BCE and Capital Gains

by Mike Holman

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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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{ 7 comments… read them below or add one }

1 ThickenMyWallet

I am going to voice an unpopular opinion, you pay tax because you make money. If someone receives a large profit from BCE and has the money to pay the tax bill, why is this so terrible? In the bigger picture, you have won.

In some countries, capital gains can be deferred if you immediately reinvest the gain so your suggestion is a good one not only for forced sales but any capital gains. It would encourage people to keep invested.

2 FourPillars

TMW – That is exactly my opinion in this case.

Apparently, at one of the BCE shareholder meetings recently there were investors complaining how they were going to “lose most of their investment to taxes” which is obviously not true.

I guess in the case of a buyout where the price is not much of a premium to the normal trading price then the investor might have a complaint.

Mike

3 MillionDollarJourney

I agree with TMW. Why did people buy BCE in the first place? To make money! Now that they’ve made money, they’re complaining about the tax consequences? If people don’t want to pay tax while investing in the stock market, keep EVERYTHING in an RRSP. Why invest in a non-reg account at all?

4 MillionDollarJourney

When you invest in the market, there are no guarantees, even if it’s a steady dividend payer. Normally, investors look at take overs as a good thing (if they own the stock being taken over). :)

5 FourPillars

Great comments!

Personally I think that if you are invested in the market you have to be able to deal with the consequences with capital gains tax – either when you are living or in your estate. It’s not like they didn’t have capital gains tax when those shares were bought.

Mike

6 bakeapples

I don’t understand how people complain when they make a profit and have to pay taxes on half of the gain. I guess that what old geezers like Chevreau do. Please hurry up and move to Florida J.C.! (or better yet Cuba)

7 Investoid

I’m with the ‘contra’ crowd here – capital gains are already taxed favourably and I don’t see a problem with paying them in a taxable account.

Mr. Cheap, what measure of inflation is appropriate? CPI? Core CPI? GDP Deflator? All have their drawbacks and typically are not representative of what a regular person experiences in terms of inflation. All Canadians experience different levels of inflation, particularly across geographic boundaries (eg. Alberta’s inflation last few years is 5%+ while Ontario’s was less than 3%). While the idea is laudable in theory, in practice I think it’s just another rule that accountants/lawyers would need to know to earn their excessive fees (apologies to tax accountants or lawyers in the crowd).

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