The Canada Revenue Agency released an Income Tax Technical News bulletin this morning officially outlining the department’s perspective on the Nortel class action settlement.
If you participated in the class action lawsuit against Nortel, you would have received both shares and cash from your participation in the lawsuit. Since these payments were distributed back in April and many current and former shareholders have wondered what the tax implications have been. Following is a summary of the tax treatment of the proceeds from the settlement based on how you originally held and currently hold your Nortel shares.
Original Shares Were Held in A Registered Plan (i.e. an RRSP or RRIF)
The settlement payment should have been paid directly to your RRSP or RRIF by Nortel. If the payment was paid directly to your RRSP or RRIF or if you received the settlement payment directly but returned it to your RRSP or RRIF within a reasonable time (i.e. within six months or by the end of the tax year, there will be no tax consequences on receipt of the payment.
If your RRSP or RRIF no longer exists or your RRSP has been converted to a RRIF, your settlement may be placed into another existing or successor plan with no tax consequences.
All Original Shares Still Held Outside and RRSP or RRIF
There is no immediate tax consequences on the receipt of the settlement payment. The adjusted cost base of all of your shares after receiving the settlement payment will be equal to the adjusted cost base of your original shares. That is, your settlement shares will have an adjusted cost base of nil. The cash payment received will then reduce your total adjusted cost base. Therefore your adjusted cost base per share will be the original adjusted cost base less the cash received divided by the total number of original and settlement shares held.
You No Longer Hold The Original Shares The Were Held Outside and RRSP or RRIF
Since you no longer own any of the original shares, you are considered to have received additional proceeds of disposition. If you are an individual and the shares were capital property, then the fair market value of the shares plus the cash will be treated as a taxable capital gain and 50% of which must be included in taxable income. The adjusted cost base of the new shares will be equal to its fair market value at the time you received the new share.
You Has Sold part But Not All of Your original Shares
The settlement payment will be treated as two separate payments for tax purposes. The settlement payment must be split proportionately between the original shares you still own and the original shares you have sold.
Please refer to the above two sections for more information.
If you have more question, please see the CRAs Income Tax Technical News – December 4, 2008 .