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.