Monday, November 17, 2008

BCE A Capital Gains Headache

If you are one of those many many people who own BCE stock you've got a potential capital gains nightmare heading your way.

Imagine the worse case scenario that you are a long time Bell Canada Pensioner and you own 10,000 shares bought over a 40 year career and now you are being forced to sell due to the impending take over by the Ontario Teachers Pension Plan and some miscellaneous U.S. equity funds, (aka assholes.)

From talks I’ve had with people in this situation they think they can just find or guess the purchase price of their shares and claim the capital gains. This would be easy, straight forward and ultimately preferable to what really needs to be done. This route however will probably get you a Revenue Canada audit so far up your ass that they can count your teeth. The BCE takeover is big, high profile and a great opportunity to grab taxes in a year heading for federal deficit. With that in mind I expect all large BCE transactions to be flagged for extra scrutiny and considering the complexity of calculating the capital gains they WILL find many erroneous or fraudulent claims.

So what really needs to be done?

Well first you have to find or estimate your original purchase price for any particular year , this site of historical BCE prices will help you out if you can't find your purchase history.

(Remember however you should use your own receipts to get your starting purchase price, I’m using the charts as an example in this case and would only use them on a tax form if I could not source the original information.)

Next you have to take that original purchase price and modify it for any transactions that would alter the “for tax purposes” purchase price such as stock splits and company spinoffs

Share Splits
• October 1, 1948 (4 for 1)
• April 26, 1979 (3 for 1)
• May 14, 1997 (2 for 1)

Nortel spin off
Aliant spin off


In Jan 1983 you bought 100 stocks at 24 and now must sell for $42.75
One would think it’s as simple as stating you have $18.75 a share capital gains x 100 shares for a declaration of $1875 on the transaction, but it's much more complicated than that

The 1983 shares in the example need to adjusted for the 1997 (2 for 1) stock split, divide the cost of these shares $24 by the split multiple (2) making your real price $12 rather than $24. Capital gains just jumped from $18.75 a share to $30 ($42.75-$12) up to $3000 total

Then you have to account for the spin out of both Nortel and Aliant

Nortel was originally priced as worth 69.21% of BCE (yeah I know, keep laughing Mr Roth) and the remainder of the company (the part not near bankruptcy) was worth 30.79%

So now your original $24 dollar shares are now worth $12 x.3079 or about $3.70, Capital gains is up to $39.05

For shares older than 1983 , BCE provides a chart of monthly average prices already accounting for the splits, The oldest, cheapest stocks are in the $6.60 range when adjusted for Nortel brings them to about $2, giving you capital gains of $40.75

“Holy shit”, for long term investors we are talking about captial gains that average about $40 per share, (gasp, turn pale, puke, as you see fit.)

Then you have to deal with the fact that you got 0.0725 units of the Bell Aliant (or its cash equivalent), and 0.915 consolidated BCE shares for each old BCE when they formed Aliant. I believe you have to take the value of the Aliant shares and convert them back into the cost per share against the original BCE shares Doh!

OK at this point it became quite obvious that I cannot do this without a tax specialist.

Now imagine the pensioner who has to go through this process for 40 years of accumulation in the company stock plan finding all the original receipts for stocks bought up to half a century ago and crunching the numbers above.

First you must think, “this is a mammoth undertaking, which I can’t handle!” and then you think “ I’m screwed!” This is going to take away my dividend income, I’m going to have a good portion of the premium on the purchase price taxed away, and the final annoying fact, this could push me into a new tax bracket and as a result most or all of the OAS (old age security) will be clawed back.

If you are in this situation know this, Revenue Canada will probably flag large Bell Canada positions for audit, especially those who don’t submit reasonable capital gains numbers. As you can see from above rough calculations long term holdings will have severe capital gains, his is not a good year to start lying, they will notice.

Now there are things you can do like gifting shares to charity, (move fast there’s little time left) or clean the losers out of your portfolio , the ones you know will never recover (Nortel anyone) and book your capital loses to offset BCE. As for the proceeds of the sale, perhaps I’ll discuss some other dividend companies that I like closer to the sales closure.

While you only get taxed on 1/2 of your capital gains in Canada, I can see people taking a bit tax hit. Be prepared and keep some cash back until after tax time or put 20% in a 3 month GIC until you see your tax bill.

Disclaimer: This is only my understanding of how these calculations work so please don’t take my word for it. Go to a tax professional and have this done properly. This was simply an exercise to show you the complexity of capital gains issue with regards to the BCE purchase and probable tax hit you might be facing.

1 comment:

nitroglycol said...

Looks like the problem has been solved for the time being... not too much in the way of capital gains there!