RE:RE:RE:RE:RE:RE:New Press Release - Stelco Holdings Inc. Announces Purchase and Cancellation of 5.1 Million Shares and Extends the Expiry Date for its Substantial Issuer Bid
Hi prested.
I will try to elaborate based on a real life example but you can be forgiven for not realizing a complicated tax rule that unless you have been biten by it you have no reason to know it. Please be aware that this only applies if you tender shares to the issuer for redemption. It does not apply when selling stock on an exchange.
As someone who has lived this and is far from a tax expert here goes based on the recently completed SIB of Algoma Steel. The excerpt that follows is from a press release issued by Algoma Steel.
To assist shareholders in determining the Canadian tax consequences of the Offer, Algoma estimates that for the purposes of the Income Tax Act (Canada), the paid-up capital per Share is approximately C$5.43 (or US$4.22, based on the Bank of Canada daily average foreign exchange rate as at the expiry of the Offer). Given that the purchase price of US$9.75 per Share exceeds the paid-up capital per Share, shareholders who have sold Shares to Algoma under the Offer will be deemed to have received a taxable dividend as a result of such sale for Canadian federal income tax purposes. The dividend deemed to have been paid by Algoma to Canadian resident persons is designated as an “eligible dividend” for purposes of the Income Tax Act (Canada) and any corresponding provincial and territorial tax legislation.
In the case above, if someone had bought shares of Algoma Steel at US$9.75 and tendered them to the company at the same US$9.75 price thinking it is a wash transaction with no tax consequences, they would be wrong. Based on the numbers above, for every share tendered, you would have to declare a dividend of (9.75 - 4.22) or $5.53US and you would have a capital loss for the same amount. So if the value of a taxable dividend to you is equal to the capital loss then you are indifferent but to most people paying tax on $5.53 immediately to bank a 5.53 capital loss to be used in the future is far from an equitable trade off.
Like I said at the beginning, complicated and unless you've been caught by this rule no need for you to know it, but when the bill comes trust me you become an "expert" on the rule trying to figure out what just happened!!!
GLTA