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Discussion Starter #1 (Edited)
ARC Resources (ARX) | Arc Energy Trust (AET) Conversion Jan 2011 ― ROC: Capital Gain?

Hello all...

I held 1200 units of Arc Energy Trust (AET) at the time of the conversion/merger to ARC Resources (ARX) as a dividend-paying corporation, and had accumulated $234 in tax-deferred income in the form of Return of Capital. I understand that ―

  • ROC must be used to lower your ACB when calculating capital gain/loss upon disposition, and
  • if, and once accumulated ROC reduces your ACB to a negative value, each amount then becomes a capital gain(s) at the time of receipt;
however, I am wondering if anyone knows whether or not accumulated ROC becomes a capital gain at the time of conversion or merger?

Thanks in advance!

Denise (aka Investorgirl)
 

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Discussion Starter #2 (Edited)
ARC Resources (ARX) | Arc Energy Trust (AET) Conversion Jan 2011 ― ROC: Capital Gain?

Upon browsing the ARX website, I found the following (but I'm still confused...) para within the document titled ARC Energy Trust Corporate Conversion Tax Implications to Unitholders:

A Unitholder, other than a Unitholder that holds Trust Units in a Deferred Plan, should report the disposition of its trust units pursuant to the Arrangement on their 2010 Income Tax Return with proceeds of disposition equal to the cost amount to the Unitholder of the Trust Units so exchanged for Common Shares of ARC Resources. As a result, such holder will not realize a capital gain or a capital loss on the exchange of their trust units for Common Shares of ARC Resources.

http://www.arcresources.com/assets/pdfs/documents/tax/ARC_TaxInfo_CorpConversion_Feb9_2011.pdf

I'm inclined to understand that the proceeds of disposition should be equal to the (adjusted) ACB. For example,

  • Purchase price AET $17.63 x 1200 units = $21,156
  • Accumulated ROC $234
  • Adjusted ACB = $20,922 ($17.435/unit)
  • Disposition of AET units = $20,922, equal to ACB of ARX shares
Any thoughts?

TIA

Denise
 

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Upon browsing the ARX website, I found the following (but I'm still confused...) para within the document titled ARC Energy Trust Corporate Conversion Tax Implications to Unitholders:

A Unitholder, other than a Unitholder that holds Trust Units in a Deferred Plan, should report the disposition of its trust units pursuant to the Arrangement on their 2010 Income Tax Return with proceeds of disposition equal to the cost amount to the Unitholder of the Trust Units so exchanged for Common Shares of ARC Resources. As a result, such holder will not realize a capital gain or a capital loss on the exchange of their trust units for Common Shares of ARC Resources.

http://www.arcresources.com/assets/pdfs/documents/tax/ARC_TaxInfo_CorpConversion_Feb9_2011.pdf

I'm inclined to understand that the proceeds of disposition should be equal to the (adjusted) ACB.

[ ... ]

I'm confused as well.

Where I've had the option of new shares without a CG or CL, the first requirement was that if the broker sent a notice asking for instructions to choose a deemed disposition (i.e. as if the stock was sold with a CG or CL) or the tax free rollover (i.e. old share ACB = new share ACB), a choice had to be made within the time limit. If no choice was recorded, the broker would register the default action with CRA.

The second requirement was to keep records showing the per-conversion ACB of the old shares and a matching start of the new shares using that ACB. So if the per-conversion ACB was $100, the starting ACB for the new shares is $100.

The trust adds the complication that a negative ACB may require some of the distribution money to be reported as a CG.

As long as the final trust ACB calculation shows the trust ACB as positive, I am at a loss as to why anything would be reported on the 2010 tax return.


I wonder if they did something weird. I'll have to check this out when I get more time.



Cheers
 

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Discussion Starter #4
ARC Resources (ARX) | Arc Energy Trust (AET) Conversion Jan 2011 ― ROC ➙ Adjusted ACB

Upon browsing the ARX website, I found the following (but I'm still confused...) para within the document titled ARC Energy Trust Corporate Conversion Tax Implications to Unitholders:

A Unitholder, other than a Unitholder that holds Trust Units in a Deferred Plan, should report the disposition of its trust units pursuant to the Arrangement on their 2010 Income Tax Return with proceeds of disposition equal to the cost amount to the Unitholder of the Trust Units so exchanged for Common Shares of ARC Resources. As a result, such holder will not realize a capital gain or a capital loss on the exchange of their trust units for Common Shares of ARC Resources.

http://www.arcresources.com/assets/pdfs/documents/tax/ARC_TaxInfo_CorpConversion_Feb9_2011.pdf

I'm inclined to understand that the proceeds of disposition should be equal to the (adjusted) ACB.

...
Having spoken with the CRA, I can confirm that the ACB of the common shares of ARC Resources should be equal to the (adjusted) ACB of the trust units, and no income need be reported as a result of the transaction. Put clearly: the only income to be reported is the non-ROC portion of the trust income, and any capital gain realized as a result of disposition per usual calculations.

Denise
 

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Having spoken with the CRA, I can confirm that the ACB of the common shares of ARC Resources should be equal to the (adjusted) ACB of the trust units, and no income need be reported as a result of the transaction.

Put clearly: the only income to be reported is the non-ROC portion of the trust income, and any capital gain realized as a result of disposition per usual calculations.

Denise
Most of this makes sense to me ... though I'd add the caution that with any investment that pays RoC, one should keep current enough with the revised ACB to be sure that the ACB won't be negative anytime soon. Once the ACB is negative, the RoC payments are reported as capital gains on that years tax return.

So if in Feb 2010 the ACB becomes negative, Feb through Dec RoC payments would be reported on the 2010 tax return as a CG. If one then bought more units in Jan 2012 so that the ACB became positive, then the RoC part is no longer reported as a CG and is only used for the ACB re-calculations.


Returning to ARX - I'm wondering if the CRA rep was thinking along the lines of a sale instead of a conversion.

You mention a CG as a result of the disposition yet the information circular states:
...The Arrangement is structured to allow Unitholders and Exchangeable
Shareholders resident in Canada to receive New ARC Shares on a tax deferred basis for Canadian income tax purposes.
This should mean that from CRA's perspective - the swap of units for shares is not a disposition so there won't be a CG or CL to report.

The only way a disposition makes sense to me is if after the conversion and swap, you sold some or all of the new shares.


Cheers
 
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