Some Direction On The Tax Treatment of The Nortel Settlement

Some guidance was released today concerning the tax treatment of a settlement involving the receipt of a cheque and shares.  The letter addresses a tax payer who held shares in a company that were sold an a capital loss incurred.  The taxpayer then received additional shares and a cheque as settlement of a legal claim against the company.  

The CRA’s position is as follows:

• The value of the settlement is the values of the cash proceeds (cheque) plus the current fair market value of the shares on the date they were received.
• The settlement will be considered to be additional proceeds of disposition and taxed as a capital gain.
• Any net capital losses carried forward from prior years or the current years may be used to reduce this gain.
• The adjusted cost base of the shares received will be their value on the date you received them.

Thus the value of the shares and the cash is a capital gain and ½ half is included in income.  Net capital losses carried forward or incurred in the current year may then be used to offset any gains realized.  If the shares are then held for a period of time, the adjusted cost base for a subsequent sale is the value on the date you received them.

It still remains unclear as to how tax payers who held the shares inside a retirement account (RRSP, RRIF, LIRA etc.) will be treated for tax purposes.

Stay tuned.