Encana Spinoff And The ACB?

by Tax Guy - Burlington Accountant on February 26, 2010 Print This Post Print This Post

Are you trying to figure out your adjusted cost base (ACB) after Encana split off into Encana and Cenovus?

Encana spun off a portion of its business into a new company called Cenovus last year. If you owned shares of Encana prior to the split, you would have received one share of Cenovus for every share of Encana you held.

Tax Deferred Rollover

The split into two separate companies did not result in a tax event. That is to say that you would not have had a taxable capital gain or loss on the spin-off. Your overall cost base remains the same between the two companies, but the question is what part of the adjusted cost base gets allocated to the new Encana and to the new Cenovus shares.

The Allocation of ACB

The ACB is allocated between the two shares based on share values on the date of the split (November 30, 2009). The allocation of your old Encana ACB may be split as follows:

  • 51.5% To the new Encana, and
  • 48.5 To Cenovus

Example Of The Split of ACB

Say you bought 100 shares Encana several years ago for $10 per share. Following the split, you will have 100 shares of Encana and 100 shares of Cenovus. The adjusted cost base of each would be:

  • Encana = $515 (or $5.15/share)
  • Cenovus = $485 (or $4.85/share)

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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{ 12 comments }

hayden March 15, 2010 at 1:41 pm

Does anyone know if the encana stock split has to be reported on a tax return? If so how is it done so that it is not a tax event? Is it just a matter of calculating the ACB post split and using those amounts as both the cost and proceeds of disposition?

hayden March 15, 2010 at 3:50 pm

Hi Tax Guy

Thanks a lot for the reply, that’s what I hoped you would say. I was just on the Encana site and found a PDF that seems to say it does have to be reported thought. Have you seen the PDF? Here is the
link

http://www.encana.com/investors/pdfs/tax-implications.pdf

I’m concerned about this part:

EnCana Shareholders should report the exchange of EnCana Common Shares as a disposition of property on their tax returns with proceeds of disposition equal to the adjusted cost base of such shares with no resulting gain or loss.

For the exchange of EnCana Special Shares for Cenovus Common Shares, there are, for most Canadian resident shareholders, four possible approaches:

Tax Guy any comments would be greatly appreciated, I thought this split would be straight forward but it seems more complicated

thanks in advance!

Tax Guy March 16, 2010 at 5:42 am

I have not reported such exchanges in the past. However, it would make sense that it should be reported and I’m now of the opinion that the exchange is reported on the return as a disposition for the original ACB (and there is no gain or loss).

You can attach a letter to your return indicating the exchange was of Encana and Cenovus under section 85.1. This would be more than sufficient to explain to the CRA why there was no gain or loss.

The issue here is not one of the taxability of the transaction but that the transaction is a disposition for tax purposes.

hayden March 16, 2010 at 10:26 am

Thanks Tax Guy, glad I came across this site, what a great resource!

Terry January 18, 2011 at 1:13 am

Please provide date of bankruptcy for laidlaw and nortel.. thanks

Tax Guy January 19, 2011 at 8:38 am

Based on a news report from CBC, Laidlaw filed for bankruptcy on June 28, 2001.

Nortel appears to have filed in January 2009.

Terry January 19, 2011 at 5:16 pm

i have dome petroleum shares.. they were bought by amoco in what year? i did not do anything like transfer, etc… how sdould i treat my shares? thanks

Tax Guy January 19, 2011 at 11:58 pm

You will need to search for the information circular to determine the tax treatment of the cost base. You can search SEDAR for Canadian companies and EDGAR for US companies.

Terry January 20, 2011 at 6:44 pm

NOTHING COMES OUT FROM SEDAR… THANKS

Tax Guy January 20, 2011 at 6:49 pm

Try an investment website like stockhouse. Corporate actions is not what this website is about.

Zedar February 27, 2011 at 10:16 pm

In the example you give above of the method to calculate the ACB of the Encana (new) and Cenovus shares – this would be the ACB to report on the tax return (ACB = proceeds of disposition) reulting on no gain.

Would this same ACB then be used for future dispositions?

“Say you bought 100 shares Encana several years ago for $10 per share. Following the split, you will have 100 shares of Encana and 100 shares of Cenovus. The adjusted cost base of each would be:

Encana = $515 (or $5.15/share)
Cenovus = $485 (or $4.85/share)”

Tax Guy February 28, 2011 at 7:41 am

The ACB is the cost of acquisition. The calculation shows how the ACB is split between the two shares.

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