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Stock capital gains related question

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  • Sep 18th, 2014 11:45 am
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[OP]
Newbie
Jan 21, 2012
97 posts
15 upvotes
Toronto

Stock capital gains related question

Hi,

I have a tax question with respect the stock of a company that has agreed to get acquired at $15.00/share in cash.

Let say that my adjusted cost base for the share is $9.00. The company has told its shareholders that the $15.00 redemption should be treated as follows : $1.00 of interest income, $12.00 of capital gains, and $2.00 of Return of Capital.

How much tax per share would I be paying?

Thanks.
9 replies
Sr. Member
Sep 12, 2012
620 posts
280 upvotes
Toronto
It would depend on your income. You would report this on your income tax return at the end of the year.

First of all, $1.00 of interest + $12.00 of Capital Gains + $3.00 of Return of Capital does not equal $15.00 per share. But let's use your example anyways.

You would report the $1.00 per share as interest on your tax return, 50% of $3.00 per share ($12.00 - $9.00) as Capital Gains (since you only report half of your Capital Gains as income), and there is no tax on Return of Capital. Taxes owing will depend on what tax bracket you are in after you include this information on top of your income.
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Feb 19, 2010
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hamandcheese wrote:
Aug 28th, 2014 11:24 am
It would depend on your income. You would report this on your income tax return at the end of the year.

First of all, $1.00 of interest + $12.00 of Capital Gains + $3.00 of Return of Capital does not equal $15.00 per share. But let's use your example anyways.

You would report the $1.00 per share as interest on your tax return, 50% of $3.00 per share ($12.00 - $9.00) as Capital Gains (since you only report half of your Capital Gains as income), and there is no tax on Return of Capital. Taxes owing will depend on what tax bracket you are in after you include this information on top of your income.
It seems to me that the Return of Capital is going to reduce the cost base to $6 thus increasing the capital gain, no?
Deal Addict
Aug 25, 2005
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Conquistador wrote:
Aug 28th, 2014 4:27 pm
It seems to me that the Return of Capital is going to reduce the cost base to $6 thus increasing the capital gain, no?
this is the correct answer.
Sr. Member
Nov 5, 2013
624 posts
121 upvotes
BenK wrote:
Aug 28th, 2014 4:28 pm
this is the correct answer.
+1

The ACB of share ($9) will be reduced by the return of capital ($3), and the capital gain will be higher $6($12-$6), 50% of which is taxable.
[OP]
Newbie
Jan 21, 2012
97 posts
15 upvotes
Toronto
hamandcheese wrote:
Aug 28th, 2014 11:24 am
It would depend on your income. You would report this on your income tax return at the end of the year.
First of all, $1.00 of interest + $12.00 of Capital Gains + $3.00 of Return of Capital does not equal $15.00 per share. But let's use your example anyways.
My bad! I have changed the Return of Capital component from $3.00 to $2.00.

Is it correct to assume that the $2.00 Return of Capital will reduce my cost base from $9.00 to $7.00?
Deal Addict
Aug 25, 2005
4608 posts
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RaOne1 wrote:
Sep 2nd, 2014 9:24 am
My bad! I have changed the Return of Capital component from $3.00 to $2.00.

Is it correct to assume that the $2.00 Return of Capital will reduce my cost base from $9.00 to $7.00?
yes
[OP]
Newbie
Jan 21, 2012
97 posts
15 upvotes
Toronto
Does that mean the Return of Capital portion does not impact my tax bill? (i.e. I will be paying the same amount of tax even if there was no Return of Capital )

With the $2 RofC, I will be paying taxes on $6 ( 1 + (12-7) x 50% )
Without the RofC, I will paying taxes on $6 ( 1 + (14-9) x 50% )
Deal Addict
Aug 25, 2005
4608 posts
1234 upvotes
RaOne1 wrote:
Sep 5th, 2014 1:30 pm
Does that mean the Return of Capital portion does not impact my tax bill? (i.e. I will be paying the same amount of tax even if there was no Return of Capital )

With the $2 RofC, I will be paying taxes on $6 ( 1 + (12-7) x 50% )
Without the RofC, I will paying taxes on $6 ( 1 + (14-9) x 50% )
With the $2 RofC, I will be paying taxes on $4.5 ( 1 + (14-7) x 50% )
Without the RofC, I will paying taxes on $3.5 ( 1 + (14-9) x 50% )

RoC doesn't impact disposal price. The general "impact" of RoC is that it gives you immediate return while delaying your tax bill. You can receive RoC and spend it and you wouldn't feel the tax impact until you dispose of the asset.

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