BCE and Capital Gains

by Mike Holman

I’ve been reading quite a bit recently about how owners of BCE (outside their rrsp) will be getting nailed with capital gains taxes once the takeover is complete. Jonathan Chevreau wrote a post about this in his blog, the Wealthy Boomer. In his comments, I noted that given the recent increase in price of the stock due to the impending takeover, the capital gains shouldn’t be a factor since the $12 price increase will cover any capital gains tax bill. This is true, assuming of course that the stock would have stayed in the $30 range for the next little while.

My worst case capital gains estimate is as follows:

If an investor has one share with an ACB of zero (worst case scenario) they will receive $42.75 for that share. Because of the capital gains tax they have to declare $21.37 as income. Let’s assume 50% income tax to keep it simple. They would then pay $10.68 in tax which means they would net $32.07 for a share that was only trading at about $30 up until a few months ago. I would argue that the final outcome of this transaction is a tax-free switch from BCE to say BMO (Bank of Montreal) with a $2 bonus tossed in (to pay the accountant?).

Chevreau made a great point about how there should be different rules for involuntary taxable events (sells) which prompted me to propose the following:

The government should change the taxable event rules to exclude involuntary switches from one Canadian company to another. Ie if you own a Canadian public company like BCE and it gets taken over and you buy another Canadian company with the proceeds then there should be no taxable event incurred and the adjusted cost base from your original shares will be transferred to the new Canadian company shares.

Any thoughts? Is this a reasonable policy for the government or is a forced sale and resulting capital gains a normal and foreseeable risk of owning equities?

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