{"id":1321,"date":"2020-04-17T22:05:22","date_gmt":"2020-04-18T02:05:22","guid":{"rendered":"https:\/\/www.adjustedcostbase.ca\/blog\/?p=1321"},"modified":"2021-04-07T15:17:02","modified_gmt":"2021-04-07T19:17:02","slug":"tax-treatment-of-the-brookfield-infrastructure-lp-unit-split-and-creation-of-brookfield-infrastructure-corporation-bipc","status":"publish","type":"post","link":"https:\/\/www.adjustedcostbase.ca\/blog\/tax-treatment-of-the-brookfield-infrastructure-lp-unit-split-and-creation-of-brookfield-infrastructure-corporation-bipc\/","title":{"rendered":"Tax Treatment of the Brookfield Infrastructure LP Unit Split and Creation of Brookfield Infrastructure Corporation (BIPC)"},"content":{"rendered":"

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.\u00a0 In addition, a cash payment was made in lieu of fractional shares.<\/p>\n

https:\/\/bip.brookfield.com\/bipc\/press-releases\/2020\/03-31-2020-120202244<\/a><\/p>\n

Each unitholder of record on March 20, 2020 received one (1) class A exchangeable subordinate voting share (the \u201cShare\u201d) 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.<\/p><\/blockquote>\n

Brookfield has provided some details on the tax treatment of this corporate event for Canadian investors on their web site:<\/p>\n

https:\/\/bip.brookfield.com\/bipc\/stock-and-dividends\/tax-information<\/a><\/p>\n

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<\/strong><\/p>\n

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.<\/p>\n

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.<\/p><\/blockquote>\n

This information is somewhat misleading because the entire value of the special distribution is not allocated as return of capital.\u00a0 Rather only a portion of the value reduces the ACB because it is offset by an allocation of partnership income.<\/p>\n

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.\u00a0 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.\u00a0 Next, the ACB should be increased by net tax allocation corresponding to the distribution.\u00a0 The process should be performed for each distribution.<\/p>\n

Brookfield has provided the following spreadsheet as a guide for calculating the ACB for BIP.UN:<\/p>\n

https:\/\/bip.brookfield.com\/~\/media\/Files\/B\/Brookfield-BIP-IR-V2\/2020%20tax\/Calculation%20of%20Adjusted%20Cost%20Base%20Common.pdf<\/a><\/p>\n

On a per share basis the value of the BIPC special distribution is equal to US$3.972.\u00a0 This is based on an exchange rate CAD$1.402036\/US$, corresponding to CAD$5.5689\/share.\u00a0 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).<\/p>\n

Based on data posted on the CDS Innovations web site, Brookfield has reported a net return of capital amount of CAD$3.59726\/share.\u00a0 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.<\/p>\n

This is the case regardless of whether or not cash was received in lieu of fractional shares.<\/p>\n

There is also a capital gain value equal to -$0.00061 associated with the special distribution.\u00a0 This does not impact ACB but results in an immediate capital loss for the 2020 tax year.<\/p>\n

Based on the above, the tax treatment of the BIPC unit split in terms of the impact on ACB is as follows:<\/p>\n

    \n
  1. The ACB of BIP.UN will be reduced by CAD$3.59726\/share.<\/li>\n
  2. The initial ACB of the BIPC shares is equal to $50.12 per share multiplied by the number of shares received.\u00a0 The total amount of the initial ACB for BIPC excludes any cash received in lieu of fractional shares.<\/li>\n<\/ol>\n

    Let’s look at the following example:<\/p>\n