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Taxes on buyouts

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  • Jun 18th, 2018 12:24 pm
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Newbie
Dec 8, 2013
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Taxes on buyouts

So I had a large cash position one account and took a gamble and bought Time Warner shares at just under 93$ last month. Merger went through and pulled in a tidy 8+ percent.

After checking my account I noticed a non resident witholding tax taken out of my account. The amount was larger than the capital gain itself. I phoned TD and they said buyouts are treated as dividends and subject to withholding taxes on the entire amount.

Does this jive with anyone elses experience? I was certain this would be a capital gains scenario where no US tax applies.
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bluebumbler wrote: So I had a large cash position one account and took a gamble and bought Time Warner shares at just under 93$ last month. Merger went through and pulled in a tidy 8+ percent.

After checking my account I noticed a non resident witholding tax taken out of my account. The amount was larger than the capital gain itself. I phoned TD and they said buyouts are treated as dividends and subject to withholding taxes on the entire amount.

Does this jive with anyone elses experience? I was certain this would be a capital gains scenario where no US tax applies.
I honestly truth never experienced this before, but even if they did withhold taxes, you claim the taxes withheld on your next year's income taxes and you are credited for the same amount, so irregardless of how much you pay now, you will receive the same amount in the end. You can claim foreign taxes paid and this will be credited onto your income tax return. See Line 405 in your income taxes.

The better thing to do in most cases is to sell before the actual buyout occurs. By doing so, you will control when and exactly how you will get the money. In most cases, you will see a few pennies discount, but I consider that a small price to pay.
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OP, I would say that it wasn't a dividend, more the cash/share portion that you received on the merger & likely the IRS deemed the cash as income, therefore taking from you as a non-resident approx 15% or 20% (or whatever rule or rate they applied on that) .... is my guess

appears it may be capital gain tax, its unclear how the IRS attributed it.

"Under the terms of the merger, Time Warner Inc. shareholders received 1.4 shares of AT&T common stock, in addition to $53.75 in cash, per share of Time Warner Inc. As a result, AT&T issued 1,185M shares of common stock and paid $42.5B in cash. Including net debt from Time Warner, we now have $180.4B in net debt."

suggest that you call the broker back for full disclosure details & ask to speak to someone at a higher level to get the 'why the withholding tax'

further reading, see pages 3 & 12

http://www.davismalm.com/1BE153/assets/ ... itions.pdf
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Jul 3, 2006
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best to sell before sale completes so you can treat it as capital gains or capital loss and not DIV
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Feb 20, 2006
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xgbsSS wrote: I honestly truth never experienced this before, but even if they did withhold taxes, you claim the taxes withheld on your next year's income taxes and you are credited for the same amount, so irregardless of how much you pay now, you will receive the same amount in the end. You can claim foreign taxes paid and this will be credited onto your income tax return. See Line 405 in your income taxes.
Not really - if the whole buyout amount really gets treated as a (foreign) dividend he is still going to get screwed, since he'll owe Canadian tax on it. Yes he might get back the USD withholding as an FTC, but only at the cost of paying income tax on a huge "dividend" at his MTR.

For example, let's say he bought at $93, and then received a $100 foreign dividend leaving his stock position at zero, and his MTR. The US Fed withholds $15 (15% of $100). His MTR is 30%. He'll owe 30k to the CRA, and have a $100k capital loss. He'll get back the 15k paid to the US on his return, but will still be out 30k - 7k = 23k, with only a 100k cap loss as compensation (which is worth at most 100k * 0.5 * 0.3 = 15k if he has capital gains elsewhere that he can offset with this).

The actual situation is more complex because the actual transaction was a mix of cash and AT&T stock, but the bottom line is still that the OP is going to get screwed if the cash amount is treated as a dividend. The screwing is probably going to come from the CRA, not the IRS.
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Sanchez wrote: Not really - if the whole buyout amount really gets treated as a (foreign) dividend he is still going to get screwed, since he'll owe Canadian tax on it. Yes he might get back the USD withholding as an FTC, but only at the cost of paying income tax on a huge "dividend" at his MTR.

For example, let's say he bought at $93, and then received a $100 foreign dividend leaving his stock position at zero, and his MTR. The US Fed withholds $15 (15% of $100). His MTR is 30%. He'll owe 30k to the CRA, and have a $100k capital loss. He'll get back the 15k paid to the US on his return, but will still be out 30k - 7k = 23k, with only a 100k cap loss as compensation (which is worth at most 100k * 0.5 * 0.3 = 15k if he has capital gains elsewhere that he can offset with this).

The actual situation is more complex because the actual transaction was a mix of cash and AT&T stock, but the bottom line is still that the OP is going to get screwed if the cash amount is treated as a dividend. The screwing is probably going to come from the CRA, not the IRS.
No, it isn't a dividend. The US withholding tax is not on dividends (although this is more common) but on cash distributions. This is a form of cash distribution. The withholding tax applies to returned capital as well when cash is paid out. So OP will be fine as the tax calculation is made on capital gains of $7 per share in your example. OP will claim the foreign taxes paid and OP is in the same situation albeit small loss in lost time on the cash withheld.

US ETFs with return of capital are also subject to the US Withholding tax.

What the agent at TD told the OP was somewhat misleading. It is treated like a dividend (in the sense that a withholding tax is applied), but on his tax return, it will be worked out.
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xgbsSS wrote: No, it isn't a dividend. The US withholding tax is not on dividends (although this is more common) but on cash distributions. This is a form of cash distribution. The withholding tax applies to returned capital as well when cash is paid out. So OP will be fine as the tax calculation is made on capital gains of $7 per share in your example. OP will claim the foreign taxes paid and OP is in the same situation albeit small loss in lost time on the cash withheld.

US ETFs with return of capital are also subject to the US Withholding tax.

What the agent at TD told the OP was somewhat misleading. It is treated like a dividend (in the sense that a withholding tax is applied), but on his tax return, it will be worked out.
In that case he won't get hosed by the CRA.

He may or may not get the withholding back via the FTC though: the problem is that you can't claim FTC above an amount which is (roughly) your average tax rate applied to foreign income. For many people their average tax rate is higher than 15%, so they get a full FTC. However, if the "dividend" in this case isn't treated as foreign income, the OP will need to have enough other foreign income and a high enough tax rate to actually use the FTC.

So it's either treated as foreign income, in which case the CRA will hose you, or its not (your claim) - but then the FTC may or may not apply.

It seems stupid to me that the US withholds on cash payouts as a result of an acquisition but they don't withhold on normal equity sales. Perhaps the OP can file a US return and recover the amount if he isn't able to get a full FTC for it.
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Sanchez wrote: In that case he won't get hosed by the CRA.

He may or may not get the withholding back via the FTC though: the problem is that you can't claim FTC above an amount which is (roughly) your average tax rate applied to foreign income. For many people their average tax rate is higher than 15%, so they get a full FTC. However, if the "dividend" in this case isn't treated as foreign income, the OP will need to have enough other foreign income and a high enough tax rate to actually use the FTC.

So it's either treated as foreign income, in which case the CRA will hose you, or its not (your claim) - but then the FTC may or may not apply.

It seems stupid to me that the US withholds on cash payouts as a result of an acquisition but they don't withhold on normal equity sales. Perhaps the OP can file a US return and recover the amount if he isn't able to get a full FTC for it.
No, it would still be the same. The 15% is just a withholding tax. That's it. For simplification, assume you paid $15 of withholding tax. You would get a $15 credit on your income taxes.

Regardless of whether you paid capital gains at the time of sale vs on your income tax return year end, it should be the same. Just in this case, $15 foreign tax credit was taken off so OP is allowed to apply for the $ amount in credit. It's a wash.

It's the same as an RRSP withdraw. While the withholding here could be 10~30% depending on the amount, it ultimately depends on the income tax rate the tax payer pays during income taxes minus what was held.
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xgbsSS wrote: No, it would still be the same. The 15% is just a withholding tax. That's it. For simplification, assume you paid $15 of withholding tax. You would get a $15 credit on your income taxes.

Regardless of whether you paid capital gains at the time of sale vs on your income tax return year end, it should be the same. Just in this case, $15 foreign tax credit was taken off so OP is allowed to apply for the $ amount in credit. It's a wash.
The FTC doesn't work like that. You don't just get an unconditional credit of the amount paid, regardless of foreign income earned or your Canadian tax rate: you need to have generated enough Canadian tax on your foreign income to exceed the FTC to get the full credit. The basic idea is that without this rule, Canada would end up paying other governments some of their tax revenue from Canada source income, which doesn't make any sense. For example, if you didn't pay any tax in the year (before applying the FTC), you definitely aren't getting the FTC.

You can work through form T2209 for the details, but right up front it tells you:
In most cases, the foreign tax credit you can claim for each foreign
country is whichever of the following two amounts is
lower:
• the foreign income tax you actually paid; or
• the tax otherwise due in Canada on your net income from that
country.
The second line is the problem: if the other country withheld a bunch of taxes (say 15% of the $50 cash that was part of the buyout), but you didn't actually receive enough foreign income from that country (since as you say this will be treated as a cap gain), you won't get the any/most/all of FTC. How much you get is determined by how much income you got from that country and your overall tax rate.

You might be able to claim a section 20(12) deduction in this case, but it's not nearly as good.
Last edited by Sanchez on Jun 17th, 2018 11:03 pm, edited 2 times in total.
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Dec 8, 2013
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porticoman wrote: OP, I would say that it wasn't a dividend, more the cash/share portion that you received on the merger & likely the IRS deemed the cash as income, therefore taking from you as a non-resident approx 15% or 20% (or whatever rule or rate they applied on that) .... is my guess

appears it may be capital gain tax, its unclear how the IRS attributed it.

"Under the terms of the merger, Time Warner Inc. shareholders received 1.4 shares of AT&T common stock, in addition to $53.75 in cash, per share of Time Warner Inc. As a result, AT&T issued 1,185M shares of common stock and paid $42.5B in cash. Including net debt from Time Warner, we now have $180.4B in net debt."

suggest that you call the broker back for full disclosure details & ask to speak to someone at a higher level to get the 'why the withholding tax'

further reading, see pages 3 & 12

http://www.davismalm.com/1BE153/assets/ ... itions.pdf
Thanks for that link. I ran the math, they taxed the entire 'boot' or cash portion at 15% (2000*53.75*.15=16125). This is the normal rate US holding rate for a cash distribution. However, at most, this 15% tax should apply to the capital gain. So I'm pretty sure TD either screwed up, or xgbsSS is correct, and I'm going to have to file a US tax return. Yikes.
Will definitely talk to TD again on Monday.
Last edited by bluebumbler on Jun 21st, 2018 6:00 pm, edited 1 time in total.
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bluebumbler wrote: ... or xgbsSS is correct, and I'm going to have to file a US tax return. Yikes.
Actually xgbsSS is saying you just have to file your Canadian return and you'll get your withholding back as an FTC. I'm saying it isn't so clear.

How much other US-source income (dividends, etc) did you have last year and what is your average tax rate? If you had enough other income and a high enough Canadian tax rate, using the FTC won't be a problem.
Newbie
Dec 8, 2013
98 posts
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xgbsSS wrote: The better thing to do in most cases is to sell before the actual buyout occurs. By doing so, you will control when and exactly how you will get the money. In most cases, you will see a few pennies discount, but I consider that a small price to pay.
I had planned on it. But the price was very volatile after the court decision, then they closed a lot earlier than I expected. It was the correct decision to hold, especially given AT&T price movement Friday. Then the tax man cometh.
Live and learn I suppose.
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Dec 8, 2013
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Sanchez wrote:
How much other US-source income (dividends, etc) did you have last year and what is your average tax rate? If you had enough other income and a high enough Canadian tax rate, using the FTC won't be a problem.
Did not earn any other US income. I usually report income of around 50,000, mostly from Canadian sourced dividends and various capital gains.
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Jul 27, 2017
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bluebumbler wrote: Thanks for that link. I ran the math, they taxed the entire 'boot' or cash portion at 15% (2000*53.75*.15=16125). This is the normal rate US holding rate for a cash distribution. However, at most, this 15% tax should apply to the capital gain. So I'm pretty sure TD either screwed up, or xgbsSS is correct, and I'm going to have to file a US tax return. Yikes.
Will definitely talk to TD again on Monday.
please post back your findings

I suspect the tax was on the cash portion that you received
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Dec 8, 2013
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So apparently the IRS takes the money and asks questions later. According to TD, I need to file a section a Section 302 Certificate in order to reclaim taxes on the cash portion of the buyout. Hopefully not too much of a pain to fill out.

Link to Explanation

Reading about section 302, I can't imagine how this would not be treated as capital gain. For those who enjoy reading about taxes: Understanding Section 302

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