How is US (foreign) merger consideration treated for tax to a Canadian shareholder?

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scorpionman
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How is US (foreign) merger consideration treated for tax to a Canadian shareholder?

Post by scorpionman » 28 Nov 2017 05:44

If a US company in which you hold shares has some sort of merger where you receive either cash, stock, or a combination of cash & stock, how is this treated to a Canadian shareholder? Is the cash a return of capital and the stock received will be the difference between the cost and selling price or is the stock and/or cash received one or both an immediate foreign dividend in the year of the distribution? On the other hand, it would seem a really bad deal if one had to consider the entire amount of the consideration as a dividend since it would be even more than your cost basis. Say a stock was bought for $50 and then you receive $50 (in cash and or stock), to pay a tax on $50 is more than even your cost basis assuming the new stock you receive is at the same price.

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Re: How is US (foreign) merger consideration treated for tax to a Canadian shareholder?

Post by Peculiar_Investor » 28 Nov 2017 07:37

I think it depends on the company and how significant their Canadian presence. There are examples in a previous topic, Foreign spin-off tax treatment where the US (or foreign) companies have specifically dealt with the Canada Revenue Agency. On the other hand, from this discussion there are also cases where the tax treatment for Canadian shareholders was not apparently given consideration.

Please bear in mind I'm not an accountant or tax lawyer, just an investor who has had holdings in US companies where favorable Canadian tax treatment has been received.
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Re: How is US (foreign) merger consideration treated for tax to a Canadian shareholder?

Post by scorpionman » 28 Nov 2017 07:43

Interesting , thanks. I'm just wondering if a foreign spinoff is the same as a foreign merger.

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Re: How is US (foreign) merger consideration treated for tax to a Canadian shareholder?

Post by Peculiar_Investor » 28 Nov 2017 07:48

I would hazard a guess that ultimately it depends on the specific companies and whether they seek an advance ruling/tax guidance on the transaction from CRA. If they do, they it should be covered in the detailed merger document, generally in a section titled 'Tax considerations' or such.

If the companies involved have a significant Canadian presence and/or shareholder base, then I'd expect them to give consideration to their Canadian shareholders.

Perhaps if you could provide names (symbols) of the companies involved then FWF'ers might be able to dig further into the details.
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Re: How is US (foreign) merger consideration treated for tax to a Canadian shareholder?

Post by DavidR » 28 Nov 2017 08:50

scorpionman wrote:
28 Nov 2017 07:43
Interesting , thanks. I'm just wondering if a foreign spinoff is the same as a foreign merger.
Not the same. In a spin-off you continue to hold your original shares in addition to the shares received. A dividend.
If you receive shares in a 'merger' then you would have to give up your shares in the company being acquired. A disposition.

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Re: How is US (foreign) merger consideration treated for tax to a Canadian shareholder?

Post by scorpionman » 28 Nov 2017 12:01

I found this article - http://www.globeadvisor.com/cch/cfine/43-2.html

"Subject to several conditions, there is a complete rollover for the exchange of shares of a foreign corporation held as capital property for shares of another foreign corporation pursuant to subsection 85.1(5).

There is a complete rollover in respect of the exchange of shares and options of a foreign corporation on a qualifying foreign merger, unless the taxpayer elects otherwise."

I'm looking more at situations where there is no major Canadian presence and partial cash/stock consideration. There seem to be several 'elections'. But does this mean you must choose an election and make this election via mail somehow and not be able to Efile? Seems a somewhat bigger hassle compared to non-taxable accounts.

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