Tax Consequences of the Power Financial Corporation – PFC (PWF.TO) / Power Corporation of Canada – PCC (POW.TO) Reorganization

Power Corporation and Power Financial announced the completion of a reorganization and share exchange on February 13, 2020:

https://www.powerfinancial.com/en/news/press-releases/2020/power-corporation-and-power-financial-announce-completion-of-reorganization-and-the-determination-of-the-final-offer-price-for-the-pre-emptive-right-122598/

Power Corporation of Canada (“Power Corporation” or “PCC”) (TSX: POW) and Power Financial Corporation (“Power Financial” or “PFC”) (TSX: PWF) today announced the successful completion of the previously announced reorganization transaction (the “Reorganization”) pursuant to which, among other things, PCC acquired all of the issued and outstanding common shares of PFC (“PFC Common Shares”) held by holders of PFC Common Shares other than PCC and its wholly owned subsidiaries (the “PFC Minority Shareholders”).

In accordance with the terms of the Reorganization, each PFC Common Share held by PFC Minority Shareholders was exchanged for 1.05 subordinate voting shares of PCC (“PCC Subordinate Voting Shares”) and $0.01 in cash.  PCC has issued 250,628,173 PCC Subordinate Voting Shares under the Reorganization and, based on the closing price of the PCC Subordinate Voting Shares on the Toronto Stock Exchange (the “TSX”) on February 12, 2020 of $34.66, the aggregate value of the consideration delivered to PFC Minority Shareholders pursuant to the Reorganization is approximately $8.7 billion.

The tax treatment of the exchange for Canadian taxpayers is described beginning on page 92 of Management Proxy Circular published on January 10, 2020:

https://www.powerfinancial.com/media/filer_public/b2/23/b223c098-cdc2-4195-b93d-8467b73c83f9/pfc-management-proxy-circular-eng-final.pdf

Exchange of Common Shares – No Tax Election

A Resident Holder whose Common Shares are exchanged for the Consideration pursuant to the Reorganization and who does not make a valid Tax Election (as defined herein) with respect to the exchange, will realize a capital gain (or capital loss) equal to the amount by which the proceeds of disposition, net of any reasonable costs of disposition, exceed (or are less than) the adjusted cost base of the Resident Holder’s Common Shares immediately before the exchange.

For purposes of computing the capital gain or capital loss realized upon the disposition of Common Shares to PCC, such a Resident Holder will be considered to have disposed of such Resident Holder’s Common Shares to PCC for proceeds of disposition equal to the aggregate of the fair market value, as at the time of the exchange, of the PCC Subordinate Voting Shares and the amount of cash received (including cash received in lieu of a fraction of a share) in consideration therefor. For a description of the treatment of capital gains and capital losses, see “— Disposition of Common Shares Pursuant to the Reorganization — Taxation of Capital Gains and Capital Losses” below.

The cost to the Resident Holder of any PCC Subordinate Voting Shares acquired on the exchange will equal the aggregate fair market value, at the time of the exchange, of the Common Shares disposed of by such Resident Holder, less the aggregate amount of cash received on the exchange. If the Resident Holder separately owns other PCC Subordinate Voting Shares as capital property at that time, the adjusted cost base of all PCC Subordinate Voting Shares owned by the Resident Holder as capital property immediately after the exchange will be determined by averaging the cost of the PCC Subordinate Voting Shares acquired on the exchange with the adjusted cost base of those other PCC Subordinate Voting Shares.

Exchange of Common Shares – Tax Election

The following applies to a Resident Holder who is an Eligible Holder. An Eligible Holder who receives Consideration pursuant to the Reorganization may obtain a full or partial tax deferral in respect of the disposition of Common Shares as a consequence of filing with the CRA (and, where applicable, with a provincial tax authority) a joint election made by the Eligible Holder and PCC under subsection 85(1) of the Tax Act (or, in the case of an Eligible Holder which is partnership, under subsection 85(2) of the Tax Act, provided all members of the partnership jointly elect) and the corresponding provisions of any applicable provincial income tax law (collectively, the “Tax Election”).

In general, an Eligible Holder may select an Elected Amount so as to fully or partially defer realizing a capital gain for the purposes of the Tax Act on the exchange. The “Elected Amount” means the amount selected by an Eligible Holder, subject to the limitations described below, in a Tax Election to be treated as the Eligible Holder’s proceeds of disposition of the Common Shares.

In general, where an election is made, the Elected Amount must comply with the following rules:

(a) the Elected Amount may not be less than the lesser of the adjusted cost base to the Eligible Holder of the Common Shares disposed of, determined at the time of the disposition, and the fair market value of the Common Shares at that time;

(b) the Elected Amount may not be less than the aggregate of the amount of cash received by the Eligible Holder as a result of the disposition (including cash received in lieu of a fraction of a share);

(c) the Elected Amount may not exceed the fair market value of the Common Shares at the time of the disposition.

Elected Amounts which do not otherwise comply with the foregoing limitations will automatically be adjusted under the Tax Act so that they are in compliance with such limitations.

Where an Eligible Holder and PCC make a valid Tax Election, the tax treatment to the Eligible Holder generally will be as follows:

(a) the Common Shares will be deemed to have been disposed of by the Eligible Holder for proceeds of disposition equal to the Elected Amount;

(b) if the Elected Amount is equal to the aggregate of the adjusted cost base to the Eligible Holder of the Common Shares, determined at the time of the disposition, and any reasonable costs of disposition, no capital gain or capital loss will be realized by the Eligible Holder;

(c) to the extent that the Elected Amount exceeds (or is less than) the aggregate of the adjusted cost base of the Common Shares to the Eligible Holder and any reasonable costs of disposition, the Eligible Holder will in general realize a capital gain (or capital loss); and

(d) the aggregate cost to the Eligible Holder of PCC Subordinate Voting Shares acquired as a result of the disposition will equal the amount, if any, by which the Elected Amount exceeds the aggregate of the amount of cash received by the Eligible Holder as a result of the disposition (including cash received in lieu of a fraction of a share), and such cost will be averaged with the adjusted cost base of all other PCC Subordinate Voting Shares held by the Eligible Holder immediately prior to the disposition as capital property for the purpose of determining thereafter the adjusted cost base of each PCC Subordinate Voting Share held by such Eligible Holder.

The Management Proxy Circular also provides some information on cash received in lieu of fractional shares:

Q: Will Shareholders be entitled to fractional shares?

A: In no event will any holder of Common Shares be entitled to a fractional PCC Subordinate Voting Share. Where the aggregate number of PCC Subordinate Voting Shares to be issued to a Shareholder as consideration under or as a result of the Reorganization would result in a fraction of a PCC Subordinate Voting Share being issuable, the number of PCC Subordinate Voting Shares to be received by such Shareholder shall be rounded down to the nearest whole PCC Subordinate Voting Share and, in lieu of a fractional PCC Subordinate Voting Share, the Shareholder shall receive a cash payment from PCC (rounded down to the nearest cent) equal to (i) the fraction of a PCC Subordinate Voting Share otherwise issuable, multiplied by (ii) the volume weighted average trading price of PCC Subordinate Voting Shares on the TSX for the five trading days on which such shares trade on the TSX immediately preceding the Effective Date. For greater certainty, holders will be entitled to receive the portion of the Consideration payable in cash equal to $0.01 per Common Share in cash without rounding.

The tax treatment depends on whether a shareholder makes an election for tax deferral under section 85 of the Income Tax Act.  Details on making the tax election are available here:

https://tax.ca/PowerCorp2020/Pg1Language.aspx

You must submit relevant information to PCC by October 31, 2020 in order to be eligible for the tax election.  You must also file the tax election with the CRA by the earlier of:

(a) the day by which PCC is required to file an income tax return for the taxation year that includes the Effective Date; and
(b) the day by which the electing Former PFC Shareholder is required to file an income tax return for the taxation year that includes the Effective Date.

Assuming a personal income tax deadline of April 30, 2021 for the 2020 tax year, the deadline for filing the election with the CRA would be April 30, 2021.

The tax consequences of the exchange may vary on a case by case basis.  The following examples are general in nature and may not apply to your particular situation.

Let’s assume that you purchased 150 shares of Power Financial Corporation (PWF.TO) on January 2, 2019 for $25.50 per share with a commission of $9.99.  If you held these shares without any further purchases until the exchange then you would be entitled to receive 157.5 shares of POW.TO (150 x 1.05 shares) plus $0.01 per share of PWF.TO, or $1.50.

But since fractional shares are not provided you would receive:

  • 157 shares of POW.TO
  • $1.50 in cash
  • Cash in lieu of 0.5 shares of POW.TO equal to $17.33 (this may vary depending on what the volume weighted average trading price is considered to be)

Assuming No Tax Election

In this case, you are assumed to have disposed of the 150 shares of PWF.TO to an amount equal to the fair market value of the 157 shares of POW.TO received plus the $18.83 in cash received ($1.50 + $17.33).  Assuming a fair market value using the closing price of $34.66 for POW.TO just prior to the exchange, the total disposition amount is $5,460.45 (157 shares x $34.66/share + $1.50 + $17.33).  You are also deemed to have acquired the 157 shares of POW.TO at fair market value equal to a total of $5,441.62 (157 shares x $34.66/share).

This can be inputted into AdjustedCostBase.ca as follows:

  1. Buy 150 shares of PWF.TO for $25.50 per share with a commission of $9.99 on January 2, 2019.
  2. Sell 150 shares of PWF.TO for a total amount of $5,460.45 on February 13, 2020 (this will result in capital gain).
  3. Buy 157 shares of POW.TO for a total amount of $5,441.62.

Assuming a Tax Election (with an Elected Amount Equal to Your ACB)

Now, we’ll assume you made an election with an Elected Amount equal to the ACB of your PWF.TO shares, or $3,834.99.  This will allow for a full deferral of the capital gain.  You are deemed to have sold your 150 shares of PWF.TO for a total equal to the Elected Amount of $3,834.99.  This will result in a capital gain of $0.  Your are deemed to have acquired the 157 shares of POW.TO for an amount equal to the Elected Amount less the amount of cash received, or $3,816.16 ($3,834.99 – $1.50 – $17.33).

Note that if you’ve chosen a different Elected Amount then the outcome will differ.

This can be inputted into AdjustedCostBase.ca as follows:

  1. Buy 150 shares of PWF.TO for $25.50 per share with a commission of $9.99 on January 2, 2019.
  2. Sell 150 shares of PWF.TO for a total of $3,834.99 on February 13, 2020.
  3. Buy 157 shares of POW.TO for a total of $3,834.99 on February 13, 2020.
  4. Return of Capital for POW.TO for a total amount of $18.83 ($1.50 + $17.33) on February 13, 2020.

PWF / POW Exchange with Tax Election

9 thoughts on “Tax Consequences of the Power Financial Corporation – PFC (PWF.TO) / Power Corporation of Canada – PCC (POW.TO) Reorganization

  1. Brynn

    Hi AdjustedCostBase.ca,

    Thank you for this website and all of the resources on your blog. They have been abundantly helpful as I’ve been learning how to calculate ACB. I’m working on tracking ACB for several investments that my husband has held since the early 2000s. I’ve been able to sort out how to handle most occurrences from your various blog posts, but there’s one that I’m not sure how to handle.

    Around March/April 2007, Nexia Biotechnologies Inc. entered into a Plan of Arrangement with Enseco Energy Services Corporation. My husband received a notice that, as a result of this plan of arrangement, unit holders of Nexia Biotechnologies Inc. (Old Nexia) would receive approximately 0.0884200 of a common share of Enseco Energy Services Corporation and 1 common share of Nexia Biotechnologies Ltd. (New Nexia). The notice also indicated that the status of fractional shares had yet to be determined.

    The following transactions occurred in my husband’s account on April 3, 2007:
    – Buy 35 shares of Enseco Energy Svcs Corp with a price of ACQ (acquisition) and a total cost of $88.42.
    – Sell 400 shares of Nexia Biotechnologies Inc (Old Nexia) with a price of DISP (disposition) and total proceeds of $208.42.
    – Buy 400 shares of Nexia Biotechnologies Ltd (New Nexia) with a price of ACQ (acquisition) and a total cost of $120.00.

    This seems to differ from your example for Power Financial Corporation, which I used previously. In that case, my husband had an exchange of securities and I used the Adjusted Cost Base value for the proceeds and cost values, deferring a capital gain or loss.

    My question for you is: In the Nexia/Enseco case, do I need to enter the proceeds and cost values that were provided in the Buy and Sell transactions, as opposed to using the Adjusted Cost Base value for Nexia Biotechnologies Inc (Old Nexia)?

    This would result in a capital loss for Nexia Biotechnologies Inc (Old Nexia) in 2007. I don’t think this capital loss was included in the 2007 tax assessment and I just read that amendments to tax assessments can be made for the previous 10 years only, so unfortunately, I think my husband will have lost the ability to apply this capital loss against any subsequent capital gains.

    I would appreciate any guidance you could offer on this. I have been searching for information on this for much of the day, with no luck in resolving the matter myself.

  2. AdjustedCostBase.ca Post author

    Brynn,

    There is some documentation on SEDAR that seems to describe the tax consequences of this event:

    https://sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00015334&issuerType=03&projectNo=00995020&docId=1805976

    “The Nexia Shareholder Pre-Amalgamation Exchange

    Pursuant to Subsection 86(1) of the Tax Act, the exchange by a Nexia Common Shareholder of Nexia Common Shares for Nexia New Common Shares and Nexia Preferred Shares will not result in a capital gain (or capital loss) to such Nexia Shareholder. The Nexia Common Shareholder will be deemed to have disposed of his or her Nexia Common Shares for proceeds of disposition equal to the adjusted cost base of the Nexia Common Shareholder’s Nexia Common Shares immediately before the exchange. The cost to the Nexia Common Shareholder of the Nexia New Common Shares and Nexia Preferred Shares will be equal to their pro rata share (based on relative fair market value) of the adjusted cost base of the Nexia Common Shareholder’s Nexia Common Shares immediately prior to the exchange.”

    This suggests that the exchange occurs on a tax-deferred basis, meaning that your previous ACB is reallocated to the new shares with no deemed disposition occurring. The reallocation is in proportion to the relative fair market values of the shares received.

    I’ll make a few assumptions:

    – The above is applicable to your circumstance.
    – The monetary amounts you mentioned correspond to the fair market values of the shares at the time of the exchange.

    In this case it looks like 42.42% ($88.42 / $208.42) of your previous ACB should be reallocated to the 35 shares of Enseco and the remaining 57.58% ($120.00 / $208.42) should be reallocated to the 400 new Nexia shares received.

    If we assume that your ACB of the old Nexia shares was $100.00 immediately prior to the exchange then this can be inputted into AdjustedCostBase.ca as follows:

    1. Sell 400 shares of Old Nexia for a total amount of $100.00. This should result in a capital gain of $0.
    2. Buy 35 shares of Enesco shares for $42.42.
    3. Buy 400 shares of New Nexia for a total amount of $57.58.

    It looks like neither fractional shares nor cash in lieu of fractional shares was received:

    “No certificates representing fractional Amalco Common Shares and New Nexia Common Shares shall be issued under the Arrangement. In lieu of any fractional Amalco Common Share or New Nexia Common Share, each registered Nexia Common Shareholder and Enseco Common Shareholder otherwise entitled to a fractional interest in an Amalco Common Share or New Nexia Common Share certificate, shall receive the nearest whole number of Amalco Common Shares and/or New Nexia Common Shares as the case may be (with fractions equal to exactly 0.5 being rounded up).”

  3. Brynn

    Thank you so very much for your help! I went through many documents on the Sedar website today, but I didn’t find that one. Even if I had, I’m not sure that I would have found that pertinent section. The example you have set out makes sense to me. I will try to implement it with our actual Adjusted Cost Base values on Saturday.

    I really appreciate your time and expertise on this. I’ve been stalled at this step and it will be great to be able to move on in this process!

  4. Brynn

    Thank you again, AdjustedCostBase.ca. I was able to implement this today. Done, documented, and moving on!

  5. EH

    I was wondering why the calculations for the PWF->POW reorg look different than the ENF->ENB acquisition. Does it have anything to do with the fact that you end up with more POW shares and fewer ENB shares?

  6. AdjustedCostBase.ca Post author

    EH,

    The instructions above and those provided for the Enbridge exchange:

    https://www.adjustedcostbase.ca/blog/enbridge-income-fund-holdings-enf-acquisition-by-enbridge-enb-implications-for-adjusted-cost-base/

    are based on documentation on tax treatment provided by these corporations. Each corporate event can be unique and have differing tax consequences. It’s also possible that the legal/accounting departments have different views on the appropriate tax treatment.

    Some notable differences between the PWF/POW and ENF/ENB reorganizations are as follows:

    – In the case of PWF/POW a negligible amount of cash ($0.01 per share) was received as part of the exchange compared to $0.45 per share for ENF/ENB.
    – For ENF/ENB the default tax treatment is for the share portion of the exchange to be on a tax-deferred basis. In the case of PWF/POW there is no tax deferral unless an 85(1) election is made.

  7. EH

    I would have thought that there would be some sort of standard of calculating the taxes on deferrals. Could Revenue Canada dispute the legal/accounting view/interpretation?

  8. Bokeh

    Many thanks for posting this. Without it, I wouldn’t have had any clue how to deal with the PWF.TO => POW.TO adjusted cost basis.

    Also, it looks like PCC *may* have extended the Election deadline to October 31, 2020.
    https://tax.ca/PowerCorp2020/Pg1Language.aspx

    Though it’s a bit confusing:
    “…please note that PCC is extending the deadline to submit the required information to PCC to October 31, 2020 and will make this website available until that date. Please note that this extension does not change the *statutory due date* for the elections.”

  9. AdjustedCostBase.ca Post author

    Bokeh,

    Thanks for sharing the updated deadline. This information has been updated above.

    According to:

    https://www.powercorporation.com/media/uploads/companies/2020-02-27-tax-instruction-letter-eng.pdf

    “Filing Deadline

    Generally, for a Tax Election to be accepted by the CRA without an electing Former PFC Shareholder being liable for a late filing penalty, the completed Tax Election must be filed with the CRA on or before the date that is the earlier of:

    (a) the day by which PCC is required to file an income tax return for the taxation year that includesthe Effective Date; and

    (b) the day by which the electing Former PFC Shareholder is required to file an income tax return for the taxation year that includes the Effective Date.

    Special rules apply when determining the filing deadline for partnerships, see “Schedule B – Completing the Tax Election Questionnaire – Preliminary Information”, below.

    PCC’s 2020 taxation year is scheduled to end on December 31, 2020 (although PCC’s taxation year could end earlier, as a result of an event such as an amalgamation), and its income tax return is required to be filed within six months from the end of the taxation year (e.g. June 30, 2021).
    Therefore, as noted below, you should review and file the completed Tax Election with the CRA as soon as possible after receiving such election form from PCC.”

    So it seems that the information must be submitted to PCC is now October 31, 2020. Assuming you have a personal income tax filing deadline of April 30, 2021 for the 2020 tax year then the deadline for filing the election to the CRA would be that date.

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