FYI .....For what is worth to current shareholders........
Ask Globe Investor Question : I own shares of Enercare Inc. (ECI), which went up a lot this week after Brookfield Infrastructure Partners LP (BIP.UN) offered to buy the company. My commission-based investment adviser suggested that I sell the stock so I can “put the money back to work right away,” but the shares are held in a
non-registered account and I would have to pay capital gains tax.
What do you suggest I do? Answer: First, kudos to you for questioning the “advice” you are being given. I can’t be certain of your adviser’s motivation, but let’s just say the benefits of following his or her suggestion would accrue largely to one party. And it isn’t you.
If you sell your Enercare shares, your adviser would presumably generate two commissions – one on the sale, and another when the cash is redeployed into another stock. Commissions for full-service brokers can easily run into the hundreds of dollars, so it’s not surprising the adviser is eager for you to sell.
Selling would have other negative consequences for you, over and above the commissions you will have to pay. I don’t know how long you have held Enercare, but the shares have more than doubled over the past three years and they jumped 50 per cent this week alone. So, if you sell, you’ll be facing a potentially significant hit from capital-gains tax.
Now, the good news: There is a way to avoid – or at least dramatically reduce – all of these unpleasant consequences.
Enercare shareholders are entitled to receive $29 a share in cash under the BIP transaction. If you accept cash, you will still have to pay capital-gains tax. However, Canadian resident shareholders can instead elect to receive units that are exchangeable into BIP shares.
Taking units instead of cash “will provide a capital gains tax-deferred roll-over option for taxable Canadian holders of shares who elect to receive exchangeable units,” the companies said. The number of exchangeable units is capped at 15 million and will be prorated if requests exceed that number, but it’s possible that you could receive units exclusively and avoid capital-gains taxes altogether. In the recent merger between Choice Properties REIT and Canadian REIT, for example, Canadian REIT unitholders who requested Choice units were not subject to proration. (Note: You’ll still have to pay capital gains tax when you eventually sell your BIP units; for tax purposes, the adjusted cost base of the units will equal the cost of your Enercare shares. For investors who hold Enercare in a registered account, there are no capital gains taxes to worry about.)
The fact that Enercare is trading very close to the $29 offer price indicates the market is assigning a high probability to the deal going through. BIP is a fine company – I own the units myself, both personally and in my model
Yield Hog Dividend Growth Portfolio, which is another reason to consider accepting exchangeable units. Your adviser may not like it, but it’s your money.
--John Heinzl