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.
This information is somewhat misleading because the entire value of the special distribution is not allocated as return of capital. Rather only a portion of the value reduces the ACB because it is offset by an allocation of partnership income.
The ACB of a limited partnership such as BIP.UN needs to be adjusted by reducing the ACB by an amount equal to the distributions received. Normally this would involve cash distributions, but in the case of the special distribution of BIPC shares, the fair market value of the shares received should be used. Next, the ACB should be increased by net tax allocation corresponding to the distribution. The process should be performed for each distribution.
Brookfield has provided the following spreadsheet as a guide for calculating the ACB for BIP.UN:
On a per share basis the value of the BIPC special distribution is equal to US$3.972. This is based on an exchange rate CAD$1.402036/US$, corresponding to CAD$5.5689/share. Since each unit of BIP.UN distributed 1/9 shares of BIPC, this corresponds to the market value above of CAD$50.12 (CAD$5.5689/share x 9 shares).
Based on data posted on the CDS Innovations web site, Brookfield has reported a net return of capital amount of CAD$3.59726/share. The ACB should therefore be reduced by a net value of CAD$3.59726/share after factoring both the value of the special distribution and the net tax allocation associated with this distribution.
This is the case regardless of whether or not cash was received in lieu of fractional shares.
There is also a capital gain value equal to -$0.00061 associated with the special distribution. This does not impact ACB but results in an immediate capital loss for the 2020 tax year.
Based on the above, the tax treatment of the BIPC unit split in terms of the impact on ACB is as follows:
- The ACB of BIP.UN will be reduced by CAD$3.59726/share.
- The initial ACB of the BIPC shares is equal to $50.12 per share multiplied by the number of shares received. The total amount of the initial ACB for BIPC excludes any cash received in lieu of fractional shares.
Let’s look at the following example:
- You purchase 500 shares of BIP.UN on January 4, 2019 for $43.00 per share with a commission of $9.99.
- Based on the record date of March 20, 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 20, 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 20, 2020 of $3.59726/share.
There are also additional return of capital transactions for 2020 that need to be factored in as a result of the 4 regular cash distributions for BIP.UN for 2020. In particular the values are:
- $0.455/share for Feb. 28, 2020
- $0.42793/share for May 29, 2020
- $0.3918/share for Aug. 31, 2020
- $0.38806/share for Nov. 30, 2020
In addition there were capital gains (with negative values) allocated for each distribution (including the special distribution) that do not impact ACB but result in immediate capital losses for the 2020 tax year:
- -$0.00067/share for Feb. 28, 2020
- -$0.00498/share for May 29, 2020
- -$0.00061/share for Aug. 31, 2020
- -$0.00061/share for Nov. 30, 2020
In addition, there would be return of capital and capital gains dividend transactions for 2019 (and any prior years that the units were owned).
The ACBs of BIP.UN and BIPC are calculated as follows:
All of the return of capital and capital gains dividend transactions (including the one associated with the special distribution) were imported using the Streamlined Import of Tax Information feature available to AdjustedCostBase.ca Premium subscribers. The initial purchase of the BIPC shares must be specified manually.
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.