Power Corporation of Canada<\/span> (“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”).<\/p>\n
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<\/span> in cash.\u00a0 PCC has issued 250,628,173\u00a0PCC 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\u00a012, 2020 of $34.66<\/span>, the aggregate value of the consideration delivered to PFC Minority Shareholders pursuant to the Reorganization is approximately $8.7 billion<\/span>.<\/p><\/blockquote>\n
The tax treatment of the exchange for Canadian taxpayers is described beginning on page 92 of Management Proxy Circular published on January 10, 2020:<\/p>\n
https:\/\/www.powerfinancial.com\/media\/filer_public\/b2\/23\/b223c098-cdc2-4195-b93d-8467b73c83f9\/pfc-management-proxy-circular-eng-final.pdf<\/a><\/p>\n
Exchange of Common Shares \u2013 No Tax Election<\/span><\/p>\n
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\u2019s Common Shares immediately before the exchange.<\/p>\n
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\u2019s 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 \u201c\u2014 Disposition of Common Shares Pursuant to the Reorganization \u2014 Taxation of Capital Gains and Capital Losses\u201d below.<\/p>\n
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.<\/p>\n
Exchange of Common Shares \u2013 Tax Election<\/span><\/p>\n
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 \u201cTax Election\u201d).<\/p>\n
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 \u201cElected Amount\u201d 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\u2019s proceeds of disposition of the Common Shares.<\/p>\n
In general, where an election is made, the Elected Amount must comply with the following rules:<\/p>\n
(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;<\/p>\n
(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);<\/p>\n
(c) the Elected Amount may not exceed the fair market value of the Common Shares at the time of the disposition.<\/p>\n
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.<\/p>\n
Where an Eligible Holder and PCC make a valid Tax Election, the tax treatment to the Eligible Holder generally will be as follows:<\/p>\n
(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;<\/p>\n
(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;<\/p>\n
(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<\/p>\n
(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.<\/p><\/blockquote>\n
The Management Proxy Circular also provides some information on cash received in lieu of fractional shares:<\/p>\n
Q: Will Shareholders be entitled to fractional shares?<\/p>\n
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.<\/p><\/blockquote>\n
The tax treatment depends on whether a shareholder makes an election for tax deferral under section 85 of the Income Tax Act.\u00a0 Details on making the tax election are available here:<\/p>\n
https:\/\/tax.ca\/PowerCorp2020\/Pg1Language.aspx<\/a><\/p>\n
You must submit relevant information to PCC by October 31, 2020 in order to be eligible for the tax election.\u00a0 You must also file the tax election with the CRA by the earlier of:<\/p>\n
(a) the day by which PCC is required to file an income tax return for the taxation year that includes the Effective Date; and
\n(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.<\/p>\nAssuming 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.<\/p>\n
The tax consequences of the exchange may vary on a case by case basis.\u00a0 The following examples are general in nature and may not apply to your particular situation.<\/p>\n
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.\u00a0 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.<\/p>\n
But since fractional shares are not provided you would receive:<\/p>\n
\n
- 157 shares of POW.TO<\/li>\n
- $1.50 in cash<\/li>\n
- 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)<\/li>\n<\/ul>\n
Assuming No Tax Election<\/span><\/p>\n
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).\u00a0 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).\u00a0 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).<\/p>\n
This can be inputted into AdjustedCostBase.ca as follows:<\/p>\n
\n
- Buy 150 shares of PWF.TO for $25.50 per share with a commission of $9.99 on January 2, 2019.<\/li>\n
- Sell 150 shares of PWF.TO for a total amount of $5,460.45 on February 13, 2020 (this will result in capital gain).<\/li>\n
- Buy 157 shares of POW.TO for a total amount of $5,441.62.<\/li>\n<\/ol>\n
![\"\"](\"https:\/\/www.adjustedcostbase.ca\/blog\/wp-content\/uploads\/pwf_pow_no_tax_election.png\")
<\/a><\/p>\n![\"PWF](\"https:\/\/www.adjustedcostbase.ca\/blog\/wp-content\/uploads\/pwf_pow_with_tax_election.png\")
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