In 2018 Enbridge Inc. (ENB) completed its plan to acquire all outstanding shares of Enbridge Income Fund Holdings Inc. (ENF). Under the arrangement, ENF shareholders received:
- 0.7350 shares of ENB, and
- a cash payment of $0.45
for each share of ENF held on November 15, 2018. An ENF shareholder also received an accrued ENF dividend of $0.1883 per share payable on November 15, 2018 for ENF shareholders of record on October 31, 2018.
An FAQ covering this arrangement is available here:
The default tax treatment for Canadians is to receive an automatic tax deferral for the ENB shares received. The initial adjusted cost base (ACB) for ENB becomes equal to a portion of the total ACB of the ENF shares, based on the proportional values of the ENB shares received and the cash consideration received at the time of the acquisition (the details of this will be illustrated in an example below). For a shareholders owning both ENF and ENB prior the acquisition, this value would be added onto the existing ACB for ENB.
Optionally, you may choose to claim an immediate capital gain rather than a deferral at your discretion by reporting the gain on your tax return. This would be calculated based on the market value of the ENF / ENB shares at the time of the acquisition.
The default tax treatment for Canadians for the cash payment of $0.45/share is the realization of a capital gain or loss. This capital gain or loss is calculated based on the difference between the cash payment and a portion of the total ACB of the ENF shares, also based on the proportional values of the ENB shares received an the cash consideration received at the time of the acquisition.
To calculate the portion of the ACB of ENF corresponding to the ENB shares received and the cash consideration received, we can look at the proportion of their values. The closing price of ENB on November 15, 2018 was $42.55, corresponding to a value of:
= $42.55 x 0.735 = $31.27
per existing share of ENF. The total value of the 0.735 ENB shares and the $0.45 cash consideration is therefore:
= $31.27 + $0.45 = $31.72
This results in:
= $31.27 / $31.72 = 98.5815%
of the ACB of ENF being allocated towards the ENB shares and:
= $0.45 / $31.72 = 1.4185%
of the ACB of ENF being allocated towards the $0.45 cash consideration.
The above values may vary slightly depending on the market value used for the ENB shares at the time of the acquisition. The market value for an ENF share just prior to the acquisition could also be used, resulting in a slightly different allocation.
There are no further tax consideration related to the accrued ENF dividend payment of $0.1883 per share, aside from their normal tax treatment as an eligible dividend. This dividend payment has no implication on ACB or capital gains.
Suppose you owned 1,000 shares of ENF just prior to the acquisition, with a total ACB of $20,000.00. You would receive:
- 735 shares of ENB (1,000 x 0.735)
- $450.00 in cash (1,000 x $0.45)
The default tax treatment would result in the ACB of the newly acquired ENB shares being equal to:
= $20,000.00 x 98.5815% = $19,716.30
based on the proportions calculated above. If you already held shares of ENB, this amount would be added to your ACB of ENB. The ACB corresponding to the cash consideration would be equal to:
= $20,000.00 x 1.4185% = $283.70
Therefore, you would realize a capital gain equal to:
= ($450.00 - $283.70) = $166.30
The initial ACB for the ENB shares would be established as $19,716.30.
AdjustedCostBase.ca can help with these calculations. The acquisition can be represented with the following transactions (assuming you have already inputted any prior purchase and sale transactions for ENF):
- Sell 14.185 shares (1,000 shares x 1.4185%) of ENF on November 15, 2018 for a total amount of $450.00.
- Sell 985.815 shares (1,000 shares x 98.5815%) of ENF on November 15, 2018 for a total amount $19,716.30 (this should result in a capital gain of $0).
- Buy 735 shares of ENB on November 15, 2018 for a total amount $19,716.30.
This results would be as follows:
If you choose not to defer the capital gain corresponding to the ENB shares received, you can do so by modifying the sell transaction for the 985.815 shares of ENF to use a total amount of:
= $42.55/share x 735 shares = $31,274.25
with the same total amount for the buy transaction for 735 shares of ENB, as follows:
Shareholders also have the option of filing a Section 85 Election in order to defer any capital gains associated with the cash consideration. However, hassle with filing this paperwork may not be worthwhile unless you held a large holding of ENF with a low ACB per share.