In line with its recent tendency to release administrative interpretations informally, in December the Canada Revenue Agency (CRA) released an Income Tax Technical News (ITTN), which can be of use to your practice.
ITTN No. 39, Settlement of a Shareholder Class Action Suit – Compensation by Way of Cash and Shares, provides an easy roadmap for dealing with receipts under class action settlements in cases where there were allegations the price paid for shares was artificially inflated. ITTN No. 39 will apply in cases where the settlement payment (consisting of cash and/or shares) is directly related to the number of shares initially acquired.
The overall approach of ITTN No. 39 is to provide for the reduction of the tax cost of the shares if they have not been disposed of, or for an inclusion in income in the year of settlement either as a capital gain or income depending on the taxpayer's own circumstances. More detailed computations will have to be done in cases where some of the shares have been sold in the intervening years while the remainder is still on hand at the time of the settlement. For those situations, we suggest referring directly to ITTN No.39, as the examples described are easy to follow.
One last interesting feature of ITTN No. 39 relates to situations where shares were originally acquired through a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF). In these cases, taxpayers will be allowed to transfer the settlement amount they receive without tax if these are put back into the RRSP or RRIF within six months of receipt or within the year in which they are received (whichever is later). From a practical standpoint, this last facet is useful as it treats the settlement proceeds as if they were received tax-free within the RRSP or RRIF.
Overall, this recent technical news provides practical solutions for dealing with the settlement of certain class actions, which sometimes could be a compliance nightmare.
Should you require any further information on the topic, please do not hesitate to contact us.
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