If you’re an individual Canadian resident investor who owned Google shares in March 2014 when Google issued its stock dividend, by now you would have received your T5 slip reporting the amount of foreign income in respect of that transaction.
But the amount reported on your slip may differ dramatically, depending on your brokerage firm’s interpretation of the Canadian tax consequences of the transaction.
In January 2014, Google, whose U.S. headquarters are in Mountain View, Calif., approved the issuance of the Class C stock dividend and set March 27, 2014 as the record date. The Class C stock dividend was issued on April 2, 2014 and the new shares began trading the next day on the NASDAQ exchange under the original symbol GOOG. The Class A stock also trades on the NASDAQ under the new symbol GOOGL.
If you owned Class A stock on the record date, you would have received shares of the new Class C capital stock on a one-for-one basis. For example, if you owned 100 shares of Class A (GOOG) stock prior to the issue of the dividend, you would now own 100 shares of Class A (GOOGL) stock plus 100 shares of Class C (GOOG) stock after April 2, 2014.
For U.S. tax purposes, the entire transaction was done on a tax-deferred basis, with the U.S. taxpayer’s tax cost divided between the Class A shares and the Class C shares on a pro-rata basis based on their respective fair market values on the first day of trading, April 3, 2014.
On that date, the official closing prices of GOOGL shares was US$571.50 and GOOG shares was US$569.74. As a result, 50.08% of a U.S. investor’s cost base was allocated to GOOGL with 49.92% allocated to GOOG.
For Canadian investors who held Google shares in a non-registered account, however, the stock foreign stock dividend is taxed as foreign income at the investor’s marginal tax rate.
Under Canadian tax law, however, the amount of a stock dividend that needs to be reported is the increase in the paid-up capital of the corporation due to the stock dividend. Under California corporate law, stocks can be issued at “par value” which forms the amount that gets added to the corporation’s capital, even if the market value is quite different.
Since Google Class C shares were issued with a par value of US$0.001 per share, this is the amount that most Canadian brokerages used as the foreign income per share to be reported on your T5 slip. It also represents the adjusted cost base of your new Class C shares, with the result that many Google investors have a significant accrued capital gain on their Class C share and an accrued capital loss on their Class A shares.
Interestingly, however, at least one Canadian brokerage has taken a different approach and reported the fair market value of the new Class C shares (GOOG) of US$569.74 per share as foreign income on their clients’ T5 slips.
If you suspect that your T5 is too high, you may wish to speak to a tax professional before filing your 2014 return.