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Bell Aliant Distribution

About Bell Aliant Distribution

About 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 tax implications – Residents of Canada 

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 tax implications – Residents of United States 

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.

 

FAQ 

 

As a BCE common shareholder, what was the impact of the transaction on my holding? Has the value of my holdings decreased because of this transaction? 

As of the effective date, July 10, 2006, in exchange for each common share that you owned, you received:

  • 0.0725 units in the Bell Aliant Regional Communications Income Fund (units)
  • 0.915 BCE consolidated common shares

For example, a shareholder with 200 BCE common shares received: 14 units of the Fund, and 183 BCE consolidated common shares, to replace the existing 200 BCE common shares. The value of your holdings should not have decreased because of this transaction.

Can you explain why the conversion formula of 0.915 and 0.0725 did not add up to one? 

The conversion involved two different types of securities traded on the stock market, namely BCE common shares and Bell Aliant units. The conversion formula took into account the fact that the units were expected to trade at a higher price than the BCE common shares. On the effective date, July 10, 2006, the units started trading on the Toronto Stock Exchange (TSX) at $33.70 (stock symbol BA.UN) and BCE common shares closed at $26.72 (stock symbol BCE).

Why do I have to return my BCE common share certificate(s) to the transfer agent? 

Under the arrangement, your shares had to be consolidated at a ratio of 0.915 consolidated common shares for each BCE common share. To that effect, as per the letter of instruction sent to all registered shareholders by the transfer agent then, you had to return all of your BCE common share certificate(s) to the transfer agent with the letter of transmittal. Your certificates were then cancelled and a new one(s) issued and sent to you. While there were no requirement to return your certificate(s) by a certain date, you will not be able to bring your old certificates to a broker to sell your shares after July 10, 2006. Shareholder that have not returned their certificates should do so to receive a valid one indicating the consolidated number of shares. Contact the transfer agent for more details.

When was the Effective Date of the transaction? 

The effective date of the transaction was July 10, 2006, 5:01 PM (EST) which was the record date of the distribution by BCE of units in the Bell Aliant Regional Communications Income Fund and the consolidation of BCE’s outstanding common shares.

What happens if I have not returned BCE common share certificates by the effective date? 

You will continue to receive your dividends on the consolidated amount of your common shares; however, you will not be able to sell your BCE common shares until you receive new share certificates.

How and when were the units listed for trading? 

The units began trading on the Toronto Stock Exchange (TSX) on July 10, 2006 under the trading symbol “BA.UN”.

How many common shares did I have to hold in order to receive the units? 

If you owned 150 or less BCE common shares on the effective date of the transaction (July 10, 2006), you were not entitled to receive any units.

What happened to shareholders holding 150 or less common shares? 

All shareholders holding 150 or less BCE common shares on the effective date (July 10, 2006) were entitled to receive a cash payment for the value of the units sold at $33.386962. For example, a shareholder with 100 BCE common shares was entitled to receive cash for the equivalent of 7.25 units. Assuming a selling price of $33.386962 per unit, the shareholder received $242.055.

What was the selling price of the units for the shareholders receiving cash instead of units (including any fractional unit)? 

The units were sold at $33.386962.

Could a shareholder with 150 or less BCE common shares elect to receive units instead of cash? 

There was no election available; all shareholders holding 150 or less BCE common shares received the cash proceeds.

Could I combine my shares that are registered under my name, for which I hold one or more certificates, with shares in an account with a broker, a financial institution or in an RRSP? 

No. The systems in place in the industry do not permit us to combine registered and non registered accounts.

What did I have to do as a shareholder to receive my units? 

Unless you were a shareholder resident in the United States, you did not need to do anything in order to receive your units.

When should I have received my units? 

The effective date the arrangement was July 10, 2006, which was the record date of the distribution by BCE of units and the consolidation of BCE’s outstanding common shares. The arrangement provided for (i) the distribution, as a return of capital to the BCE common shareholders of record at 5:01 PM (EST) on July 10, 2006 of 0.0725 units for each BCE common share, and (ii) the consolidation of the BCE common shares at a ratio of 0.915 consolidated common shares for each BCE common share. The distribution of the units began on July 17, 2006.

What happened if I were entitled to receive fractions of units or fractions of consolidated common shares pursuant to the arrangement? 

Fractional units and fractional consolidated common shares were not distributed but aggregated and sold on the market by a broker appointed by the transfer agent, which distributed the net cash proceeds, after commission expenses, to registered shareholders pro rata based on their fractional entitlements.

Was I to continue to receive dividends on my BCE common shares after the share consolidation? 

As per the information on page 43 (question 2) of the BCE 2006 Management Proxy Circular, the company planned to maintain the current dividend rate of $1.32 per BCE common share.

In addition to the dividends on the BCE common shares, will I receive additional cash distributions on the units? 

It was expected that a shareholder holding units received pursuant to the arrangement would receive annual cash distributions of $1.4065 in fund distributions and BCE common share dividends combined per pre-consolidation common share or $1.32 on a BCE common share and $2.74 on each unit after the arrangement. The increase from $1.32 to a $1.4065 payout represented a 6.5% increase to shareholders. Please see Question 3 on page 43 of the BCE 2006 Management Proxy Circular for more information.

 

SHAREHOLDER DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN (PLAN)

Were my shares in the Plan part of the BCE transaction?

Yes, the same arrangement applied to the shares in the Plan as well as shares outside of the Plan. In order to determine the number of units to which a registered shareholder holding BCE common share certificate(s) and shares in the Plan was entitled to, we added together the shares in certificate form and the shares in the Plan account maintained by the transfer agent and registered under the same shareholder’s name. Consequently, a new certificate for the consolidated BCE common shares was issued (for the shares in certificate form) and the shares in the Plan were adjusted automatically following the consolidation of the BCE common shares. Consult the quarterly statement for the second quarter of 2006 for more details. Finally, a certificate for the total number of units was sent to the shareholder.

Has the Plan been modified following the arrangement?

No. The Plan has not changed. Dividends on your BCE common shares were reinvested in the plan as usual.

 

General Information

Why has BCE decided to pursue this transaction with Aliant?

The following is a summary of the principal strategic benefits of the transaction for BCE:

  • Creates the largest North American regional telecommunications service provider, spanning six provinces, while being one of the largest wireline operations in North America;
  • Simplifies Bell Canada’s regional asset structure;
  • Creates an entity well suited for an income trust – The predictability and stability of the cash flows of the combined operations provides strong incentive to structure them under an income trust;
  • Sharpens focus on customer needs for lower density markets with dedicated management team;
  • Combines Bell Canada’s wireless operations – Under the Fund transaction, Bell Canada took full ownership of Aliant’s wireless assets and DownEast retail distribution network;
  • Surfaces value and return of capital to shareholders.

For more information on the new income fund, please refer to the Management Proxy Circular.

Where can I find out more about the Bell Aliant Regional Communications Income Fund?

For more information, please refer to the Aliant 2006 Management Information Circular (PDF 6.02 MB).

What is an income fund or income trust?

An income trust holds income-producing assets and is designed to provide a tax-efficient means to make cash distributions to trust unitholders. They are sometimes called “income funds” or “income trusts” and the two terms are interchangeable.

What was the distribution policy of the fund?

It was expected that the Fund would make monthly cash distributions to its unitholders and it was anticipated that initially it would pay out approximately 90% of its cash available for distribution to its unitholders. The board of trustees of the fund met periodically to determine the monthly distribution rate which were announced via news releases as appropriate.

 

U.S. SHAREHOLDERS

If I am a shareholder resident in the United States, what did I have to do to receive the units?

A U.S. shareholder as of the effective date, or his/her representative, received a Qualified Purchaser Certification prior to the effective date and was required to send in such Qualified Purchaser Certification duly completed to the transfer agent prior to 5:01 PM (ET) on July 10, 2006 to attest of their status as a "qualified purchaser".

Were shareholders resident of the United States eligible to receive units?

No, unless they were “qualified purchasers”. Units to other U.S. shareholders were not distributed but aggregated and sold on the market on their behalf by the transfer agent, at $33.386962, which distributed the net cash proceeds after expenses to such holders, pro rata, based on their entitlements.

 

Tax Consequences

Will I need to include the value of the units in my income?

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.

Will the receipt of the units affect the adjusted cost base of any BCE common shares that I own?

The adjusted cost base of your BCE common shares will be reduced by the value of your unit entitlement on July 10th, 2006, including any whole and/or fractional units subsequently sold on your behalf. This value will also become your adjusted cost base in your units and/or the whole and/or fractional 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.

What was the value of my units at the time of the distribution by BCE on July 10th, 2006?

With respect to the value of your 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 should not be considered responsible for any additional tax, interest or penalties assessed by the Canadian tax authorities should you have decided to use the above-mentioned estimate of the value of the units.

What are the tax consequences to receiving cash for the units?

Upon the subsequent disposition by the transfer agent of units and fractional units, shareholders will be 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. The value had been determined at $33.40 per unit.

This is all very confusing. Could you please provide an example which explains the Canadian tax consequences?

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:

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.

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).

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 exceeded or are exceeded by the tax cost of your whole units sold.

I am a US shareholder. What are the tax consequences for me?

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 were also not be subject to Canadian income tax.

From a US tax standpoint, the gross amount of the distribution paid to you was 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 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 may have decided to use the value of the units as determined by BCE (referred to above under “Canadian Tax Considerations for Canadian Shareholders”) 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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