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NB Telegraph-Journal ~ The Bottom Line ~ Exempt Capital Gains ~ May 15, 2006 - 29 May 2006 by TaxHelp

If Prime Minister Stephen Harper could have found a way to get one of his election promises into his first budget, many of us would be much happier. In the Conservative Party’s federal platform document “Stand Up for Canada” on page 16 there are three bullet points under the caption ‘Real tax relief for Canadians’. The third states that they would “Eliminate the capital gains tax for individuals on the sale of assets when the proceeds are reinvested within six months. Canadians who invest, or inherit cottages or family heirlooms, should be able to sell those assets and plough their profits back into the economy without taking a tax hit. It is time government rewarded Canadians who reinvest their money and create jobs.”

I know that this is an exciting concept that is extremely timely. There are all kinds of investors amongst us. Some have apartments buildings that have appreciated in value and the owners would like to now sell in order to move up to larger holdings. Others have monies tied up that could be released to invest in small businesses of their own undertaking. And finally there are those who play the market and trade shares.

However, this tax relief was no where to be found in the budget a couple of weeks ago. And unfortunately, many of us will be facing a larger tax bill next spring through no fault of our own.

Anyone who holds Aliant shares (which closed Friday at $36.25) are probably going to end up having them disposed of later this year. On Wednesday of this week, shareholders are expected to approve the business swap and creation of an income trust. If this happens, anyone who holds Aliant will have each share exchanged for one unit of the trust. This kind of disposition can result in capital gains. The taxable income is calculated based on the amount of the disposition less the cost of the share divided by two. Put another way, if someone had bought Aliant for $16.25 and it was sold for $36.25, the profit (in this case known as a capital gain, and ignoring any sales commissions) is $20 and the taxpayer must report $10 on his tax return. For many New Brunswick Aliant employees, this will be a moot point. Generally since its inception the stock has decreased in value from a high of over $40 to a low in the mid-$20’s (although it rebounded throughout 2003). Many employees (and those of the post Bruncor era in particular) own shares purchased through a stock option plan and seemed to have often bought high only to sell at a loss. However, if the value continues to increase, there is a good chance that shareholders will be in the money as they say.

Phone company stock has traditionally been found in the portfolios of the proverbial widows and orphans (along with bank shares). For many the acquisition costs were low, and so there may be substantial gains. This forced sale will increase taxpayer’s net income which may reduce or eliminate a whole handful of government benefits like the supplement, GST credit and Old Age Security in addition to increasing the taxes due next spring. Needless to say, there will be no real gain as the securities are being flipped, and some may have to really sell in order to pay the tax bill.

Prime Minister Harper’s bullet point would have eliminated the tax in this situation as the stock is being reinvested into the income trust. Hopefully someone in Ottawa may consider this and provide some administrative relief, but I wouldn’t hold my breath.

Finally, and on a related matter, the Aliant website FAQ points out that those shareholders who own 25 or fewer shares must make an election to have their holdings converted. Otherwise their position will be sold outright and they will receive the funds less any selling expenses, and not the new income trust units.

Roger Haineault is with Help 4 Taxes. He can be reached with specific questions or suggestions by calling 506-693-1212 or by e-mailing him at roger@help4taxes.ca. His column appears Mondays.