On March 31, 2020 Brookfield Infrastructure Partners L.P. (BIP.UN) announced the completion of a unit split corporate event resulting in each unitholder of BIP.UN on record as of March 20, 2020 receiving 1 shares of Brookfield Infrastructure Corporation (BIPC) for every 9 units of BIP.UN. In addition, a cash payment was made in lieu of fractional shares.
Each unitholder of record on March 20, 2020 received one (1) class A exchangeable subordinate voting share (the “Share”) of BIPC for every nine (9) BIP units held, or approximately 0.11 Shares for each BIP unit…BIP unitholders will receive a cash payment in lieu of any fractional interests in the Shares. Brookfield Infrastructure will use the volume-weighted average trading price of the Shares for the five trading days immediately following the special distribution (March 31 through April 6) to determine the value of the Shares for the purpose of calculating the cash payable in lieu of any fractional interests.
Brookfield has provided some details on the tax treatment of this corporate event for Canadian investors on their web site:
I owned units of Brookfield Infrastructure Partners L.P. prior to the formation of Brookfield Infrastructure Corporation. As a result of the special distribution from Brookfield Infrastructure Partners L.P. in 2020, I received class A shares of Brookfield Infrastructure Corporation. Is this special distribution taxable for Canadian federal income tax purposes
The special distribution should not be taxable to a Canadian resident shareholder for Canadian income tax purposes provided the adjusted cost base of the Brookfield Infrastructure Partners L.P units held by the Canadian resident holder is positive after the special distribution.
In general, this special distribution will reduce the adjusted cost base of your interest in the partnership units of Brookfield Infrastructure Partners L.P. by an amount equal to the fair market value at the time of the special distribution of the class A shares you have received. The same fair market value at the time of the special distribution of the class A shares received is your adjusted cost basis. The 5-day volume weighted average price (VWAP) ending April 6, 2020 of a share of Brookfield Infrastructure Corporation on the Toronto Stock Exchange was $50.12.
They do not seem to have provided any information on the tax treatment related to the cash received in lieu of fractional shares on either their web site of the BIPC prospectus posted on SEDAR.
The CRA’s Income Tax Folio S4-F5-C1, Share for Share Exchange provides some insight on the tax treatment of cash received in lieu of fractional shares during a tax-free rollover:
Subsection 85.1(1) may apply where a vendor [taxpayer]… cannot receive a fractional share but is entitled under an exchange agreement to receive cash or other non-share consideration in lieu of a fraction of a newly issued share of the purchaser. Where the total value of the non-share consideration is $200 or less, the vendor may ignore the computation of the gain or loss on the partial disposition and reduce the adjusted cost base of the shares received by the amount of that value. Alternatively, the vendor may report the gain or loss. Where the total value of any non-share consideration received is greater than $200, the vendor must report any gain or loss from the disposition.
This interpretation bulletin indicates that when the cash received in lieu of fractional shares is less than $200 then there is a choice:
- Consider the cash received as a deemed disposition on a proportional number of the original shares.
- Reduce the adjusted cost base of the new shares by an amount equal to the cash received.
In the case of BIPC, the cash received is based on the average value of BIPC around the time of the exchange, calculated to be $50.12 per share. This guarantees that the amount of cash received in lieu of fractional shares will be less than $50.12, so the option to reduce the ACB of the new shares by this amount is available.
In the example below we will choose a reduction in ACB based on the cash received in lieu of fractional shares. This is the simplest choice, and results in potentially deferring a small capital gain.
Based on the above, the tax treatment of the BIPC unit split is as follows:
- The ACB of BIP.UN will be reduced by the value of the BIPC shares received. This should be equal to the number of BIPC shares received multiplied by the provided average market value of $50.12 per share.
- The initial ACB of the BIPC shares is equal to the same reduction in ACB above, or $50.12 per share multiplied by the number of shares received. This effectively reallocates a portion of the ACB just prior to the unit split from BIP.UN to the newly received BIPC shares.
- The ACB of the BIPC shares is reduced by the amount of cash received in lieu of fractional shares.
Let’s look at the following example:
- You purchase 500 shares of BIP.UN on January 4, 2016 for $31.50 per share with a commission of $9.99.
- On March 31, 2020 you receive 1 share of BIPC for every 9 shares of BIP.UN. In this case you would be entitled to 55.55 shares of BIPC.
- Since cash is issued in lieu of fractional shares, you would receive 55 shares of BIPC plus $27.57 in cash (0.55 shares of BIPC x $50.12 per share).
The ACB can be calculated on AdjustedCostBase.ca using the following transactions:
- Buy 500 shares of BIP.UN on January 2, 2019 for $43.00 per share with a commission of $9.99.
- Buy 55 shares of BIPC on March 31, 2020 for $50.12 per share (with no commission) (for a total amount of $2,756.60).
- Return of Capital for BIP.UN on March 31, 2020 equal to a total amount of $2,756.60.
- Return of Capital for BIPC on March 31, 2020 equal to a total amount of $27.57.
The ACBs of BIP.UN and BIPC are calculated as follows:
Included in the above are Return of Capital / Capital Gains Distribution transactions for BIP.UN. These have been imported using the Streamlined Import of Tax Information feature available to AdjustedCostBase.ca Premium subscribers.
There was a further distribution from BIP.UN with a record date of February 28, 2020 that may impact ACB and capital gains. However, the tax breakdown details for the distribution is not yet available at this time.
If the market value of the share received as larger than the ACB of BIP.UN just immediately prior to March 31, 2020 then your ACB will be reduced to $0 and you will incur an immediate capital gain on the residual amount. Your adjusted cost base cannot be negative.