Tax Accountant by trade - here is your responseI have read many posts on the issues of tax consequences following the acquisition by RECO of ROE shares.
I will give you a response as a tax accountant, I am 36 years in thus business, so I know for a fact as that is all I do.
There is NO POSSIBLE ROLLOVER under section 85 of the Income Tax Act or, any other provision in the present situation.
Why?
Because the shareholders of ROE received common shares of RECO and not preferred shares.
For rollover section 85 to apply and allow shareholders to roll over their ROE shares at cost, they needed to receive in exchange of their ROE shares, RECO preferred shares issued at $ 1 but redeemable later on at its fair market value determined on the exchange.
An example will help:
Lets say I had purchased 500,000 shares of ROE at 10 cents or, costing me $ 50,000, however shares trade at 46 cents which gives me a fair market value of $ 230,000.
RECO decides to buy out my 500,000 shares by giving me .046 shares of RECO for each ROE SHARE or 23,000 RECO shares trading at $ 10 per share, or valued at $230,000
In this exchange, you can see that I am being bought out at the fair market value of $ 230,000. I am simply trading in my ROE shares valued at $ 230,000 for equivalent RECO shares valued at $ 230,000
The trade is done at its fair market value and not at its cost, therefore my disposition of 500,000 shares of ROE at 46 cents gives rise to capital gain of $ 180,000 which is subject to taxes ($230,000 sale price less cost of $50,000)
People will say that they want to benefit from section 85 of the Income Tax Act to rollover their shares at the cost of $ 50,000 and not at the market price of $ 230,000 HOWEVER this is not possible because you are receiving RECO common shares that are worth $ 230,000 (common shares are like cash).
For the rollover to work, you needed to received preferred shares (not common shares) that are issued at at $50,000 to you but are redeemable in the future at $ 230,000. In this case then you will elect to dispose your ROE shares at the $ 50,000 cost to receive preferred RECO shares at $ 50,000 cost but redeemable at $230,000.
Once you redeem the preferred shares at $ 230,000 from RECO then you have a capital gain of $ 180,000 that is subject to taxes.
The same happens with options. Upon takeover the options vest at market price. You are therefore subject to taxes. You receive equivalent options from RECO but, YOU HAVE A TAX BILL.
Tax man does not care, they want their cut ASAP.
Of course the disposition price because your new cost of RECO shares or options.
This helps explain why two insiders sold - it is to pay off the taxes following the takeover as amount owed on shares and options on their transaction was very large given that no possible rollover was available.
When in doubt, ask your tax accountant.
These insiders owned both ROE and RECO, that was the problem. If they owned just RECO then there would be no tax issues.
mpo