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Bell Aliant distribution

About Bell Aliant distribution

Bell Aliant distribution - July 2006

Effective July 10, 2006, the new Bell Aliant Regional Communications Income Fund (Fund) combining Aliant’s wireline operations with some of Bell’s was created. Under the arrangement, BCE shareholders received .0725 Bell Aliant units for each BCE common share held. In addition, BCE conducted a share consolidation under which one common share of BCE became .915 share.

The following summarizes certain information contained in the Notice of the BCE plan of arrangement dated April 2006 (PDF 2.1 MB). This summary is qualified in its entirety by the more detailed information contained in the Circular, in the Annexes attached thereto and in the document incorporated by reference therein. Shareholders are urged to read the Circular, the attached Annexes and the document incorporated therein by reference carefully and in their entirety.

 

Background Information 

Effective July 10, 2006, the new Bell Aliant Regional Communications Income Fund (Fund) combining Aliant’s wireline operations in Atlantic Canada with our wireline operations in our regional territories in Ontario and Québec and our indirect interest in Bell Nordiq was created.

BCE shareholders received a distribution of capital worth over $2 billion in the form of units in the Fund (units). Shareholders with more than 150 BCE common shares received 0.0725 units for every BCE common share owned. Shareholders owning 150 and less BCE common shares and non qualified US purchasers received cash instead.

Because of the value of BCE would be reduced by the amount of the capital distributed to shareholders, BCE conducted a share consolidation at the same time in order to approximately hold the value of each BCE common share constant. Consequently, following the Plan of Arrangement, each share held before the transaction became 0.915 BCE common shares. The transaction had important tax implications and the calculation of the BCE cost.

Note that this transaction did not change the overall value of your investment, it just changed the number of BCE common shares you owned, while rewarding you with units in the new Bell Aliant Regional Communications Income Fund or the proceeds representing the sale of the units you were entitled to receive.

 

Summary of the tax implications for Canadian shareholders 

As confirmed by an advance income tax ruling received from the Canada Revenue Agency, the distribution of units effected by BCE on July 10th, 2006 constituted a return of capital and was not considered to be a dividend. Thus, no amount in respect thereof needed to be included in income.

However, the adjusted cost base of your BCE common shares was reduced by the value of your Bell Aliant units entitlement received on July 10th, 2006, including any whole and/or fractional share unit subsequently sold on your behalf. This value also becomes your adjusted cost base in your units and/or the whole and/or fractional share units that were sold on your behalf. The tax cost of your BCE common shares was also reduced by your tax cost in the fractional consolidated common shares, if any, sold on your behalf.

With respect to the value of your Bell Aliant units or of the units that were sold on your behalf at the time of the distribution by BCE, you should note that the Canadian tax authorities do not prescribe any specific methodology for determining such value. BCE believed that the use of the volume weighted average trading price over the two days July 10th and July 11th, 2006, provided an accurate indication of such value. Using this method, BCE determined that the units had a value of $33.40 per unit at the time of the distribution. However, BCE cannot provide assurance that the Canadian tax authorities agreed with the use of such method. Consequently, BCE could not be considered responsible for any additional tax, interest or penalties assessed by the Canadian tax authorities should you decide to use the above-mentioned estimate of the value of the units.

Upon the subsequent disposition by the transfer agent of the Bell Aliant units and fractional units, shareholders were treated as having realized a capital gain or a capital loss equal to the difference between the value of the units (or fractional units) on the time of the distribution on July 10th, 2006 and the cash proceeds received by them.

Here is an example which explains the tax consequences for residents of Canada:
Assume that you own 250 pre-consolidation common shares having an aggregate tax cost of $5,605 and that the value of your unit entitlement and / or the whole and fractional units that were sold on your behalf was $605 (250 x 0.0725 = 18.125 units, with an assumed value of $33.40, for a total of $605). The tax cost of your consolidated common shares would be determined as follows:

Calculation of BCE cost - 250 pre-consolidation common shares x 0.915 = 228.75 consolidated common shares

The tax cost of the pre-consolidation common shares of $5,605 is reduced by $605 as a result of the distribution of the units which distribution is received tax-free. The remaining $5,000 is the tax cost of the 228.75 consolidated common shares and $605 is the tax cost of the units received and / or the whole and/or fractional units that were sold on his or her behalf.

Calculation – Fractions

BCE fractional share - The tax cost of the 0.75 of a consolidated common share is $ 16.39 [($5,605 - $605) x 0.75 / 228.75 consolidated common shares]. If the proceeds received from the sale of the fractional share are $20.00, the gain in respect of such fractional share will be $3.61 ($20.00 - $16.39). As a result of the sale, the tax cost of the remaining 228 common shares will be $4,983.61 ($5,000 - $16.39).

Bell Aliant fractional unit - The tax cost of the 0.125 of a unit is $ 4.17 [$605 x 0.125 / 18.125 units]. If the proceeds received from the sale of the fractional unit are $4.25, the gain in respect of such fractional unit will be $0.08 ($4.25 - $4.17). As a result of the sale, the tax cost of the remaining 18 units will be $600.83 ($605 - $4.17).

If you were a shareholder whose whole units were sold on your behalf, a gain or loss, if any, was realized to the extent that the proceeds received from such sale exceed or are exceeded by the tax cost of your whole units sold.

 

Summary of the tax implications for U.S. shareholders 

An advance income tax ruling received from the Canada Revenue Agency confirmed that the distribution of units effected by BCE on July 10th, 2006 constituted a return of capital for Canadian income tax purposes and was not considered to be a dividend. Consequently, no withholding on account of Canadian income taxes was required to be made on your unit entitlement or on the units subsequently sold on your behalf. Any gain or loss that you realized in connection with the whole and/or fractional units and, if applicable, the fractional consolidated common shares sold on your behalf was also not subject to Canadian income tax.

From a US tax standpoint, the gross amount of the distribution paid to you was to be included in your gross income as a dividend, to the extent paid out of the current or accumulated earnings and profits of BCE, as determined under US federal income tax principles. The portion, if any, of the distribution paid to you which was not paid out of BCE’s current or accumulated earnings and profits was treated as a tax-free return of capital, causing a reduction in the tax cost of your BCE common shares. BCE does not calculate its earnings and profits under US federal income tax rules. Therefore, BCE was not be in a position to provide such information to you. You needed to consult with your own tax advisors regarding the amount of the distribution that was to be treated as a dividend for US federal income tax purposes.

BCE should meet the definition of a qualified foreign corporation and, as such, if the distribution was considered to be a dividend in whole or in part, you were generally able to benefit from the 15% maximum US federal income tax rate on such dividend, provided you were an individual and you met the required 60 day holding period.

With respect to the determination of the amount of the distribution paid to you, the arrangement provided that the distribution was effective as of July 10, 2006 at 5:01 p.m., the time of the transfer of the units in favor of the transfer agent. However, there is uncertainty as to whether you were considered to have received the distribution as of that time from a US tax standpoint. If you were considered to have received your distribution as of that time, you could decide to use the value of the units as determined by BCE (referred to above under “Tax Implications for residents of Canada”) in calculating the amount of the distribution you received. However, BCE cannot provide assurance that the US tax authorities agreed with the use of such value. Consequently, BCE should not be considered responsible for any additional tax, interest or penalties assessed by the US tax authorities should you have decided to use the above-mentioned estimate of the value of the units.

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