Bell is Ringing

Goodbye to an Old Favourite
The sale of Bell Canada Enterprises Inc. (BCE) to the Teacher's Pension Plan is the biggest leverage buyout in the world, at almost $50 billion dollars. The Canadian Press reports that "few corporate deals in this country have elicited such strong feelings in the business community and beyond. "

According to the Toronto Star, "institutional investors reveled in the large premium that will be earned from the takeover of Canada's largest telecommunications company." Keep in mind that Bell shares were trading at just over $31 prior to this offer.

Bell Canada is one of the most widely held securities in the country and there is a group of investors that are not as happy with the buyout of Bell, also known as the "widows and orphan's fund."

Many Canadians have grown accustomed to the steady dividends and the dependable returns and they voiced their displeasure to BCE management last Fall. The buyout at $42.75 per share this Spring will result in a "gold rush" of sorts as individual investors, pension plans, tax accountants, investment advisors and governments will be kept very busy. The capital gains impact to thousands of investors will be significant.

For one of our clients, Alice, 93, Bell shares have been in her family for generations. "My husband (Earl, deceased) bought Bell shares over 70 or 75 years ago on the advice of his parents. After Earl's parents passed away, we inherited their shares." She continued, "everybody bought shares back then and never sold any, including myself." Alice added that she is comfortable with the sale "so long as it is at a good profit."

Taking BCE off the market will create a huge hole for many Canadians. Now investors will have to look for another reliable place to invest their money for growth and a dependable income stream. And, there has been little written about the tax consequences of this transaction to those investors who hold shares outside of pensions and other registered retirement plans. Billions of dollars of taxable capital gains will result in a windfall for the governments.

Alice's financial advisor, and son, Bruce Gabel did some calculations for her. Hypothetically, if she had 5,000 shares, her proceeds after the forced sale (at $42.75 per share) would total $213,750. The capital gains taxes that arise from this sale are calculated on what Alice and Earl would have paid for the shares originally.

If, for example, they paid $2.75 per share over 70 years ago, $40 per share would be the capital gains, which are taxable at half the rate. This would mean that Alice would have to pay taxes on $100,000. At her tax rate of 46%, Alice's tax bill will come to $46,000. That is substantial.

Offsetting the Tax Liability
If Alice had some capital losses from other shares that she had sold or if she had some shares that currently could be sold at a loss, these losses could be used to offset some or all of these gains.

Another strategy combines philanthropy and tax planning and involves donating shares in kind to a registered charity like the United Way, the Heart and Stroke Foundation, or perhaps Alice's church. Alternatively, Alice could like to set up her own foundation as a legacy. The minimum investment (perhaps donation of shares) would be $25,000 and one of the conditions is that every year, all of the income from the foundation would need to be paid out to registered charities close to her heart.

Part of the Bell shares' popularity over the last century results from the dependable dividends. For many Canadians, receiving the quarterly dividend cheque for so many years made being a shareholder more than just an investment. Old Ma Bell, a Canadian icon whose history dates back 127 years to the birth of the telephone, has woven into the fabric of our lives. That could be the reason for the outcry.

Replacing Dividend Income
The most overlooked vehicle for tax effectiveness and choice is in the area of Corporate Class mutual funds. This platform allows investors to purchase investments in a specific portfolio (fund) and gives them the ability change to another fund in the same structure without triggering a taxable event. Investors could allow the investment to grow and defer taxation on the growth for decades. Additionally, they could elect to receive income in the form of Canadian dividends, capital gains or return of capital. It's their choice. The least known of these three preferred income options is the Return of Capital (ROC) approach.

What if we take Alice's hypothetical after-tax proceeds of $167,750 from the sale of her Bell shares and place it in the Franklin Templeton Balanced Growth Portfolio and receive a 6% annual income (which can be paid monthly or quarterly). This income of $10,065 per year would be tax-free. This amounts to more than the dividend payout from her Bell shares which would provide $5,475 after tax per year. The tax-free nature of ROC would run out after 12 or so years.

These returns are projected and not guaranteed, but neither were the dividends from the Bell shares. The most recent dividend payout from Bell shares translates into a 3.4% dividend yield.

At Bick Financial, we provide perspective and advice to those who have decisions to make. Whether you or someone you know will need to make a decision on what to do with their Bell shares, we are here to help. Ask your Bick Financial Advisor Today.