# Can there capital gains taxes on acquistions/mergers?



## ITConsultant (Mar 5, 2014)

I owned Paladin Labs, had about about a 300% gain on it. Then they did this (copied from my account activity):

PALADIN LABS INC TO C$1.16 CASH +1.6331 ENDO INTL +1 KNIGHT THERAPTCS/SH

So they gave me some cash, and 2 new stocks for each share of paladin labs I had.

The interesting thing is is that the book values that were used in the new stocks were set as if I just bought them, so they are showing as much higher than what I originally paid for the original stock.

Is it possible that I could I be facing a forced capital gain here?


----------



## HaroldCrump (Jun 10, 2009)

Do you mean the book values that you see in your online brokerage account?
That does not matter - what matters is the price at which the merger/acquisition deal was done.
You can find that number in the press release or the documentation for the acquisition/merger. The document/press releases should also be available on the company's website.

Your capital gains will be reportable based on the actual merger deal pricing, not what the brokerage is showing in your online account.
Brokerage does not report book values or capital gains to the CRA - you have to do that when you sell and realize a capital gain/loss.

If the display in your account is bothering you, you can have the book value amended.
Some brokerages allow you to do this self-serve online (Scotia iTrade does).
I suppose in other cases, you might be able to call and have them manually edit it.

In either case, the display in your brokerage account is immaterial to the real issue, which is that you have to keep track of the actual deal price and use that when reporting capital gains on your taxes.


----------



## RBull (Jan 20, 2013)

^Book values can be adjusted DIY at RBC as well.


----------



## ITConsultant (Mar 5, 2014)

HaroldCrump said:


> Do you mean the book values that you see in your online brokerage account?
> That does not matter - what matters is the price at which the merger/acquisition deal was done.
> You can find that number in the press release or the documentation for the acquisition/merger. The document/press releases should also be available on the company's website.
> 
> ...


Thanks. However, do you know in these cases if the tax would be payable right now, or only when I sell either of the new stocks? I.e. is such an event a deemed disposition of the original security?


----------



## Eclectic12 (Oct 20, 2010)

ITConsultant said:


> ... The interesting thing is is that the book values that were used in the new stocks were set as if I just bought them, so they are showing as much higher than what I originally paid for the original stock.
> 
> Is it possible that I could I be facing a forced capital gain here?


Some good information ... but I'm not seeing the answer to this question.
As is usually the case - it depends.

I've had similar done where one of a couple of situations happened.

The first situation is that it was a Canadian stock/spin off where the transaction was approved by CRA as a tax free rollover. So as long as the investor updated the adjusted cost base (ACB) in their records to assign the original cost correctly to the new shares - that's all that was required.

An example is stock A was bought for $10 and is trading for $27 at the date of the new shares being swapped for the old ones. The company press releases indicated CRA allowed tax free rollover where 30% of cost was to go to stock B and 70% to stock C.
So the new share ACB was recorded where stock B had an ACB of $3 and stock C had an ACB of $7.


The second is similar but required telling the broker by a set date if one wanted to elect to use the tax free rollover or pay the capital gains as if the old stock was sold. The tricky part here is that if no instructions are given to the broker, the default action will happen which could mean reporting a capital gain. The default action is not always to use the tax free rollover (or probably more accurately, tax deferral).

The tax free rollover works the same, where it is chosen.

Where the stock is deemed to be sold, then on that year's tax return - Schedule 3 is used to report the capital gain. Then the proceeds (i.e. $27 it was trading for) are used in the same ratios to set the ACB for stock B (i.e. $8.10) and stock C (i.e. $21.60). The key here is the capital gain for the original stock is being paid so the ACB for the new stock must have a much higher value to avoid paying the capital gain twice.


The third is the stock was deemed to have been sold so that there is no choice - the capital gain has to be recorded and the new stock ACB is recorded at the higher level.


Note that this is for Canadian stock so there may be wrinkles I have have not mentioned for a US stock held by a Canadian.


Cheers


*PS*

The above is the answer to your question:


> However, do you know in these cases if the tax would be payable right now, or only when I sell either of the new stocks?
> I.e. is such an event a deemed disposition of the original security?


If there is a choice, there should be info on the company web site. If there is a choice, your broker should have sent a letter to outline the options and indicate what the deadline is to give your instructions to them. Again, this is for a Canadian stock held by a Canadian.


----------

