First, a quick recap: Effective March 31, BIP.UN unitholders received one share of BIPC for every nine units of BIP.UN held. BIP.UN investors – who will continue to own the same number of BIP.UN units as before, in addition to the new BIPC shares – will also receive a small amount of cash in lieu of any fractional BIPC shares to which they are entitled.
The unit split, or special distribution, is not taxable. However, for BIP.UN investors who hold their units in a non-registered account, the adjusted cost base (ACB) of their BIP.UN units should be reduced by an amount equivalent to the fair market value of the new BIPC shares and any cash received. The ACB must be reduced in order to properly calculate the capital gain for tax purposes when the units are sold. Investors who hold BIP.UN in a registered account will not face capital gains tax, so their ACB is irrelevant.
I hold my BIP.UN units and BIPC shares in a non-registered account. How do I figure out the fair market value of the new BIPC shares and, hence, the amount by which I need to reduce the ACB of my BIP.UN units?
This is where the confusion starts. Different brokers are providing different numbers to their clients. I’ve seen “book value” or “average cost” figures for the new BIPC shares as low as $44.71 and as high as $51.77, based on e-mails from readers.
According to Melissa Low, senior vice-president of investor relations with Brookfield Infrastructure Partners, investors can use the “volume-weighted average price” (VWAP) for BIPC over its first five trading days on the Toronto Stock Exchange through April 6. The VWAP – which is the total dollar value traded divided by the total number of shares traded – works out to $50.12 per share for BIPC over this period, Ms. Low said in an e-mail.
So, if you owned, say, 100 BIP.UN units and received 11 shares of BIPC in the unit split, you would reduce the ACB of your BIP.UN units by $551.32 (11 times $50.12) and the cash received in lieu of a partial share. The company is using the same five-day VWAP formula to calculate the cash portion.
One other thing to note: The ACB per share of your new BIPC shares would also be $50.12. You would use this number to calculate your capital gain – or capital loss – when you eventually sell your BIPC shares or exchange them for BIP.UN units.
I don’t want to exchange my BIPC shares for BIP.UN units. I would prefer to convert my BIP.UN units into shares of BIPC. How can I do that?
For now, you can only exchange shares of BIPC for units of BIP.UN – not the other way around (the company is looking into whether it could facilitate such exchanges but has offered no details). If you would prefer to own only BIPC, you would need to sell your BIP.UN units and purchase BIPC shares. This would entail two trading commissions and, if you’re investing in a non-registered account, could trigger capital gains tax on the sale of your BIP.UN units.
That said, BIPC does have certain advantages over BIP.UN in a non-registered account. BIPC will pay dividends that qualify for the dividend tax credit (DTC), and the dividends will not be subject to U.S. withholding tax. BIP.UN’s distributions, on the other hand, do not qualify for the DTC and may be subject to withholding tax. But the amount subject to withholding tax is typically small – in the first quarter it was just 2 US cents.
“While we don’t expect there to be significant U.S. withholding tax, it can vary quarter-by-quarter and has the potential to be higher with the recent acquisitions of some new U.S. businesses,” Ms. Low said. Under the Canada-U.S. tax treaty, you can avoid withholding tax by holding BIP.UN in a registered retirement account. However, withholding tax still applies in a tax-free savings account, she said.
I’m wary of holding BIPC because the new corporation only owns a small subset of the partnership’s global infrastructure assets. Is this a concern?
It’s true that BIPC directly owns only natural gas transmission assets in Brazil and regulated utility operations in the United Kingdom. However, the fact that BIPC shares are exchangeable into BIP.UN units and both will pay the same dividend/distribution means BIPC investors are getting access, albeit indirectly, to the complete global portfolio of infrastructure assets including railways, ports, toll roads, pipelines, communications towers and data centres. It also means that BIP.UN units and BIPC shares should track each other closely in price, which has been the case so far.
“In order to effectuate the stock split, we were required to transfer assets to BIPC since it’s a separate reporting issuer/listed entity,” Ms. Low said.
“The assets we chose to transfer (being the gas transmission system in Brazil and regulated distribution operations in the U.K.) were selected as they were relatively easy to transfer considering regulatory, legal, financial and tax implications,” she said.
“So while BIP LP and BIPC do hold different assets, investors should be indifferent as BIP LP and BIPC should be considered one entity, which collectively share the same assets, returns and management.”
Full disclosure: The author owns BIP.UN and BIPC personally and in his model Yield Hog Dividend Growth Portfolio. View it online at tgam.ca/dividendportfolio.
E-mail your questions to email@example.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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