Boyd Group Income Fund has indicated that it plans to convert from an income trust to a corporation and exchange its units on a one-for-one basis for new common shares. I am concerned because the company indicated that “the exchange of fund units for common shares … will occur on a taxable basis, which may result in a taxable event for certain unitholders.” Can you explain what’s going on?
First, the good news: Winnipeg-based Boyd Group Income Fund (BYD.UN) has posted exceptionally strong returns, thanks to its successful growth-by-acquisitions strategy. For the five years ended Sept. 30, the operator of collision repair and auto glass shops in Canada and the United States delivered a total return of 34.7 per cent on an annualized basis, crushing the S&P/TSX Composite Index’s annualized total return of about 5.3 per cent over the same period. (Both figures assume reinvestment of dividends.)
To put that into dollar terms, if you’d purchased $10,000 of Boyd Group Income Fund units five years ago, your stake would be worth more than $44,000 today.
Now the bad news: If you hold your units in a non-registered account, you could be facing a hefty capital gains tax hit when the conversion takes place. That’s because the exchange of units for common shares of the new company, to be called Boyd Group Services Inc. (ticker BYD), will be treated for tax purposes as if you had sold the units.
Assuming the transaction is approved at a special meeting on Dec. 2, the conversion to a corporation would be effective on Jan. 1. The conversion requires two-thirds approval of votes cast by unitholders of Boyd Group Income Fund and by class A shareholders of subsidiary Boyd Group Holdings Inc.
The silver lining here is that, based on the information provided by the company, the transaction will fall in the 2020 tax year, said Dorothy Kelt of TaxTips.ca. That means investors who exchange their units for new shares won’t have to report their capital gains, if any, until they file their 2020 tax returns in 2021. (Investors who hold the units in a registered plan will not face any capital gains tax.)
The exact conversion price – and, hence, the capital gain that unitholders will report – won’t be known until the transaction is finalized. But given Boyd Group Income Fund’s stellar performance, some investors will almost certainly be paying Ottawa a sizable chunk of cash. Returning to the example of an investor whose $10,000 investment has grown to $44,000, assuming a combined federal and provincial marginal tax rate of 50 per cent, the capital gains tax hit would be $8,500. (Only half of capital gains are added to income and taxed at the investor’s marginal rate.)
Why is Boyd Group Income Fund converting to a corporation, and why did it choose a taxable exchange instead of a tax-deferred rollover?
One goal of conversion is to broaden the company’s investor base by adopting a structure “that is more generally accepted and understood by the capital markets and global institutional investors,” the company said when it announced the transaction in September. Another objective is to remove the restriction on foreign ownership; currently, non-residents of Canada are permitted to collectively own no more than 49 per cent of the fund’s units.
“We believe that while we might have been able to run with the current structure for some time, that non-Canadian foreign ownership restriction was starting to get too close … to really be comfortable for an extended period of time,” Brock Bulbuck, chief executive of Boyd Group Income Fund, said on a conference call with analysts.
“I think Bloomberg [data are] showing that the non-Canadian ownership is in the neighbourhood of 32 per cent. And our analysis actually shows it’s somewhat higher than that,” he said.
As for the decision to choose a taxable conversion, the company said in an e-mail that “it results in the simplest post-conversion structure that will be the most easily understood and accepted by the capital markets. It will also provide the most flexibility for the business going forward.”
“Pursuing a tax-deferred strategy may have benefited certain unitholders by deferring the tax they would otherwise pay, but doing so would also result in a future tax liability for the Fund, which would ultimately be borne by all shareholders, whether or not they were a Fund unitholder that participated in the conversion transaction.”
More details about the proposed transaction, including the tax consequences, will be included in an information circular that the company plans to mail to unitholders in late October.
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