The article “A company I hold stock in was acquired or merged—do capital gains apply?” was originally published in MoneySense on August 8, 2023.
Shareholders cannot always prevent a company sale or merger from going ahead. When that happens, do you still owe taxes on capital gains?
“A stock I used to own was recently sold to a private equity firm. Is there a strategy for avoiding a capital gain on a sale I did not authorize? I voted against the sale.” Mary
Tax implications of acquisitions, mergers and spinoffs
There are a few transactions that can have unintended tax consequences for an investor even if they have not sold their shares, Mary.
When a company is acquired, like the one you owned, capital gains may or may not be triggered. When a publicly traded company is “taken private” and all outstanding shares are purchased, this is generally a taxable transaction that would trigger capital gains (or capital losses, if the acquisition price is lower than your adjusted cost base).
When a company is acquired, shareholders may receive cash, like you presumably did, Mary. But they sometimes receive shares of the acquiring company, or a combination of cash and shares. When shareholders receive shares of the acquiring company, they may be able to defer some or all of their capital gain and have their adjusted cost base transferred to the new shares. This is called a section 85 rollover, and it requires you to file an election using Form T2057 Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation.
When a company is merged or spun off
In the case of a merger or an amalgamation, section 87 of the Income Tax Act may apply and permit the transaction to be tax-deferred by default without filing an election.
Spinoffs—like AT&T Inc.’s spinoff of Warner Bros. Discovery Inc. in 2022—may also be tax-deferred under section 86.1 of the Act. Companies sometimes turn a part of their business into a new company to trade separately on a stock exchange. The Canada Revenue Agency (CRA) publishes a list of eligible spinoffs that it has approved for potential tax deferral. A letter must be generally be submitted by a taxpayer along with their tax return to make the election.
Companies will often provide general information to shareholders about the potential tax implications of transactions like this, but they usually encourage investors to seek out personalized tax advice.
Does it matter if a shareholder agrees with the transaction?
Unfortunately, Mary, the fact that you voted against the acquisition does not impact the tax treatment. If the majority of shareholders approved the sale and it went ahead, you and all other shareholders will be treated the same.
It sounds like you will end up with an unintended capital gain. Consider tax-loss selling of any other shares that are trading at losses to try to offset the gain. If your income for the year is moderate or high, and you have registered retirement savings plan (RRSP) room, you can consider contributing to offset some of the taxable income. Otherwise, it is unpleasant to have to pay tax that you do not want to pay, but most investment incomes and some tax outcomes are beyond investors’ control.
