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Hey everyone. I’m hoping that someone can help me understand ACB when a merger occurs.

Say for example I buy 100 shares of ABC:
  • $10.00 a share
  • 100 shares
  • Commissions are $11.95
  • Total outlay is $1011.95
  • ACB is $10.12
Now, say there is a merger and XYZ purchases ABC, and gives 0.167 shares of XYZ for every one share of ACB:

  • 100 shares of ABC at 0.167 = 16 whole shares of XYZ
  • On the day of the merger, the price of XYZ is $65.00
  • My partial 0.70 shares from the conversion give me cash in lieu of $45.50.
My questions:
  • Is the cash in lieu treated as a return of capital?
  • What do I use as the base for my ACB? The original $1011.95 less the $45.50?
Thanks for any input!
-10d
 

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Calculating ACB / ROC...

10d -

I don't know the true answer to your question, but I can tell you how I treated the 'cash-in-lieu' question.

Some investments typically pay dividends or trust income payments with a portion of it being ROC, which means that as long as the cumulative payments do not exceed the original cost of the investment it is not considered taxable, but does reduce the ACB.

For example, if your $10 / share investment paid $1 per year as a ROC (which means that this amount came out of original trust's principal, rather than as income resulting from its business), it would reduce your ACB until the 11th year when it would become taxable at your marginal tax rate.

Understanding that, and assuming you only received cash in lieu of fractional shares, and that the merger did not have a cash consideration component, I have treated the disposition of the fractional share as a capital gain (or loss).

In your example, then:

  • Original outlay of 100 shares $1011.95 resulting in ACB of $10.1195/sh
  • Original outlay is still $1011.95, but now for 16.7 shares resulting in ACB of $60.5958
  • Sale of 0.7 shares ($65 - $60.5958) x 0.7 = $3.0829 capital gain
For your remaining 16 shares, the ACB remains at $60.5958/share.

If your actual numbers are significant, and/or there were actual ROC's on the original investment (check your T3 as Box 42), and/or there were cash considerations as part of the merger ― you may want to consult with your accountant. If you use a full-service brokerage, they may well be able to help you with this with one simple call.

Happy investing!

Denise
 

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Follow-up ‣ Calculating ACB / ROC...

Note: this post makes assumptions which should not be taken as professional in any way. You would well be advised to consult with an accountant or with the Canada Revenue Agency.

10d -

So, your question got me wondering (and since I can never leave well enough alone), I started looking over my 'cash-in-lieu' transactions.

In the first case, I am referring to the PetroBakken (PBN) merger arrangement with TriStar (TOG) Oil & Gas in 2009.

I was part of the remaining 19.4% who received $4.7503 and 0.3617 PBN share for each TOG share, and was left with a fractional share (0.4). I received cash-in-lieu for 0.4x the arrangement value of $27.6464 of the PBN share. This indicates that the disposition was of the resulting (new) share of PBN, and not of the previously held share (TOG).

This may or may not be considered a sell transaction resulting in a capital loss or gain as there was a cash consideration which affected the ACB of my PBN shares. Or it could merely have been that my brokerage did not identify the disposition as a sell. I was required, in this transaction, to complete and submit a T2057, 'Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation'.

In another merger, there was a share exchange of 0.041:1 resulting in my having a 0.5 fractional share. The transaction appeared as an exchange, and a buy/sell on my trading summary, the proceeds of which was the disposition of the fractional share.

My experience aside, if your fractional share was both:
  • the result of share exchange, with no cash consideration (as in the PBN merger), and
  • that your cash-in-lieu did not exceed $200
then I feel confident in suggesting that your 'cash-in-lieu' proposition could either be treated as a sell of your fractional share, or as a reduction of ACB, whichever you prefer.

I have reviewed the CRA Income Tax Interpretation Bulletin #IT-115R2 regarding Fractional Interest in Shares and infer that your shares are considered convertible properties. I provide relevant excerpts below, but I encourage you to read the entire bulletin.

Within the summary:
Subsection 51(1) permits a taxpayer to exchange a convertible property issued by a corporation for shares of the corporation on the basis of a tax-free rollover. A convertible property is capital property that is a share of the corporation, or a bond, debenture, or note of the corporation that contains a conversion privilege. In the course of an exchange of convertible property, a taxpayer may be entitled to receive a fractional interest in a share. This bulletin discusses how a taxpayer may account for cash or other non-share consideration received in lieu of a fractional interest in a share.​

Within para 1:
... subsection 51(1) permits a taxpayer to exchange convertible property issued by a corporation for shares of one or more classes of capital stock of the same corporation on the basis of a tax-free rollover, that is, the adjusted cost base of the convertible property becomes the adjusted cost base of the shares received. No consideration other than shares of the corporation may be received for the convertible property. “Convertible property” is capital property of a taxpayer that is a share of a corporation, or a bond, debenture, or note of a corporation that contains a conversion privilege.​

and skipping past para 2, which is an odd thing anyway...

Within para 3:
... In lieu of the fractional shares, the agreement will usually provide for the taxpayer to receive cash or other non-share consideration. The application of subsection 51(1) generally will not be denied in these circumstances, notwithstanding that the subsection requires that no consideration other than shares be received for the convertible property. In addition, if the value of the cash or other non-share consideration received by a taxpayer in this manner does not exceed $200, the taxpayer may either calculate and report the gain or loss on the amount received in lieu of the fraction of a share, or ignore that calculation and reduce, by the amount received, the adjusted cost base of the shares received.

However, where the total amount or value of any non-share consideration received exceeds $200, the taxpayer must report, to the extent that total amount or value exceeds the paid-up capital of the fractional share that the taxpayer is entitled to receive on the exchange, a deemed dividend under subsection 84(3) and any gain or loss, as the case may be, from the disposition of its fractional share.​

The bulletin does go on to provide an example of calculating gain or loss, but I assume you already know how to do that.

So, to FINALLY answer your questions:

  • Is the cash in lieu treated as a return of capital?
Definitely not. Depending on your particular circumstances, you may wish to either:
  • declare a gain or loss by reporting the disposition of the fractional share as a sell (in your example, reporting a gain of $3.0829), or
  • adjust your ACB by the amount received for the disposition of the fractional share accordingly.
(Notice, though, that the $200 limit basically makes it irrelevant as to which choice you make.)
  • What do I use as the base for my ACB? The original $1011.95 less the $45.50?
If you choose to "sell" your fractional share, your ACB is simply the original outlay divided by the number of shares received ($1011.95/16.7): $60.5958 per share.

If you choose to simply reduce your ACB by applying the cash received to the original outlay, then your calculations are partway there. That amount would be divided by the number of whole shares received [($1011.95-$45.50)/16]: $60.4031 per share.

Fun fun!

Denise
 
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