I received restricted, unregistered (1 year) shares in a US public company in exchange for my Canadian controlled corporation shares in a private company as part of a takeover transaction. There was a cash component to the deal as well. What I would like to know is when do I recognize the capital gain. On the close date of the deal or when the shares are no longer restricted and become registered and eligible for sale? The cash I assume is taxable on receipt. I would like to argue that the shares in the acquiring company had no value until they were eligible for sale and therefore not taxable until tradable.
Thanks in advance for your suggestions.
N_tooner
PS I am a Canadian citizen and resident
When to recognize restricted shares
Moderator: Mark T Serbinski CA CPA
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You got cash for some and shares for the rest. There is a reportable capital gain for the cash portion. The rest is a rollover under section 85.1 and you can read CRA's interpretation of the rules in IT450 at http://www.cra-arc.gc.ca/E/pub/tp/it450r/it450r-e.html.
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By email, the thread's originator has pointed out that there are conditions that must be satisfied by the purchaser in order for the rollover provisions to apply. In particular, IT450R says, "In order for the conditions in subsection 85.1(1) to be satisfied, the purchaser must be a Canadian corporation, as defined in paragraph 89(1)(a) ..."
In my previous replies, I read too hastily and neglected this condition. In most cross-border takeovers, it is possible to structure the transaction by having the purchaser incorporate a subsidiary in Canada and issue shares in that subsidiary rather than its own shares as payment for the sold shares. That didn't happen in this case and the conditions in 85.1(1) thus do not apply.
That would indicate that N_Tooner's full proceeds, including the shares he took as payment, are taxable proceeds and capital gains taxes are payable for both the cash and restricted shares he received.
There is another possibility that can be used in this case but one has to be willing to defend the position if CRA questions it. When disposing of taxable property, if you receive something that is not cash, you can claim a reserve to defer taxation on the portion that cannot be realized in a year. (The classical example is selling a piece of land for a note that will be paid out over a number of years, in which case the gain can be spread over those years.) In this case, N_Tooner received restricted shares which could not be sold for a year. He can make a (pretty good IMO) case that the reserve provisions apply because the shares are restricted. See http://www.cra-arc.gc.ca/formspubs/prio ... 6r4-e.html for the mechanics.
This only defers for one year because the share restrictions come off then. Still, that may save some tax. The entire amount need not be claimed as a reserve, so splitting the income evenly across two years, thus being taxed in lower brackets, is a possibility.
In my previous replies, I read too hastily and neglected this condition. In most cross-border takeovers, it is possible to structure the transaction by having the purchaser incorporate a subsidiary in Canada and issue shares in that subsidiary rather than its own shares as payment for the sold shares. That didn't happen in this case and the conditions in 85.1(1) thus do not apply.
That would indicate that N_Tooner's full proceeds, including the shares he took as payment, are taxable proceeds and capital gains taxes are payable for both the cash and restricted shares he received.
There is another possibility that can be used in this case but one has to be willing to defend the position if CRA questions it. When disposing of taxable property, if you receive something that is not cash, you can claim a reserve to defer taxation on the portion that cannot be realized in a year. (The classical example is selling a piece of land for a note that will be paid out over a number of years, in which case the gain can be spread over those years.) In this case, N_Tooner received restricted shares which could not be sold for a year. He can make a (pretty good IMO) case that the reserve provisions apply because the shares are restricted. See http://www.cra-arc.gc.ca/formspubs/prio ... 6r4-e.html for the mechanics.
This only defers for one year because the share restrictions come off then. Still, that may save some tax. The entire amount need not be claimed as a reserve, so splitting the income evenly across two years, thus being taxed in lower brackets, is a possibility.
So the last piece of this puzzle is how to value the shares at filing. I understand the reserve but how do you value the non trading shares as they will fluctuate in value between the close date of the deal and the time in which the restrictions will come off. Can you adjust the amount once the reserve has been created?
N_tooner
N_tooner
Re: When to recognize restricted shares
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