On December 31, 2010, Canadian Oil Sands completed its reorganization from an income trust structure into a corporate structure (the “Conversion”) with the result that Canadian Oil Sands Trust (the “Trust”) was dissolved and the business was carried on through the corporate entity named “Canadian Oil Sands Limited” (“COSL”).
Pursuant to the Conversion, all outstanding Trust units (“Units”) were exchanged for common shares of COSL (“COSL Shares”) on a tax deferred basis. COSL is now subject to corporate taxes and dividends paid by it will be “eligible dividends”.
The following is a general summary of tax considerations for holders of COSL Shares (“Shareholders”) who hold the COSL Shares as capital property. This is not intended to be tax advice and Shareholders should seek their own professional advice on all tax matters.
Canadian Resident Tax Information
Each former unitholder of the Trust acquired COSL Shares at the holder's cost in his or her Units. The cost amount of a particular COSL Share must generally be averaged with the cost of the holder's other COSL Shares to determine the adjusted cost base on a per share basis.
Canadian residents who are individuals (other than certain trusts) and who receive dividends on COSL Shares must include those dividends in computing their income and will be subject to the normal gross up and dividend tax credit rules applicable to dividends paid by taxable corporations under the Income Tax Act (Canada) (the “Tax Act”). This will include the enhanced gross up and dividend tax credit treatment applicable to dividends which are designated as “eligible dividends”. At the present time COSL anticipates that all dividends that it declares will be designated as “eligible dividends”.
Where the recipient is a corporation the dividends will generally be included in the corporation's income and may be deductible in computing the corporation's taxable income. A corporation that is a “private corporation” or a “subject corporation” (as defined in the Tax Act) may be liable to pay a refundable tax of 33 1/3% under Part IV of the Tax Act on dividends received on COSL Shares.
On a disposition of a COSL Share a Shareholder will generally realize a capital gain or loss equal to the amount by which the proceeds exceed or are less than the aggregate of the Shareholder's adjusted cost base and any reasonable costs of disposition. The cost of a COSL Share will generally be the average of the cost of all COSL Shares held as capital property.
Generally, one half of any capital gain realized in a taxation year must be included in income and one half of any capital loss realized in a taxation year must be deducted from capital gains realized in that year. Allowable capital losses in excess of taxable capital gains may generally be carried back and deducted in any of the three preceding taxation years or carried forward and deducted in a subsequent taxation year against taxable capital gains realized in such years to the extent and under circumstances described in the Tax Act. The amount of any capital loss realized by a corporation on the disposition of a COSL Share may be reduced by the amount of dividends received or deemed to be received on such shares (or shares substituted therefor) to the extent under circumstances described by the Tax Act. Similar rules may apply where a corporation is a member of a partnership or a beneficiary of a trust that owns COSL Shares directly or indirectly through a partnership or trust. A Shareholder that is, throughout the year, a Canadian controlled private corporation (as defined in the Tax Act) may be liable to pay in addition to tax otherwise payable a refundable tax on certain investment income including taxable capital gains. Shareholders to whom these rules may be relevant should consult their own tax advisors.
COSL Shares Held in Deferred Plans
Subject to the provisions of any particular plan, COSL Shares that are listed on the Toronto Stock Exchange (“TSX”) will be qualified investments under the Tax Act for trusts governed by registered retirement savings plans, registered retirement income plans, deferred profit sharing plans, registered disability savings plans, registered education savings plans and tax free savings accounts. While held in these plans, income earned on the COSL Shares will generally not be subject to taxation. Withdrawals from registered retirement savings plans, registered retirement income plans, deferred profit sharing plans and registered education savings plans as well as the taxable portion of withdrawals from registered disability savings plans will be included in income when withdrawn and will not be considered to be dividends or capital gains.
Non-Resident Tax Information
On the Conversion each former non-resident unitholder of the Trust acquired COSL Shares at the holder's cost in his or her Units. The cost amount of a particular COSL Share must be averaged with the cost of the holder's other COSL Shares to determine the adjusted cost base on a per share basis.
In circumstances where Units held by a non-resident were "taxable Canadian property" then the COSL Shares received on the Conversion will be deemed to be taxable Canadian property to that non-resident.
Dividends paid to a non-resident on COSL Shares are subject to Canadian withholding tax at the rate of 25% unless the rate is reduced under the provisions of an applicable double taxation treaty. Where a non-resident is a US resident entitled to benefits of the Canada – United States Income Tax Convention,1980 and is the beneficial owner of the dividends then the rate of Canadian withholding tax is generally reduced to 15%.
A non-resident will generally not be liable for Canadian income tax on a disposition of COSL Shares unless the COSL Shares are deemed to be taxable Canadian property at the time of disposition and the non-resident is not entitled to relief under an applicable double taxation treaty.
Generally, COSL Shares will not be taxable Canadian property at a particular time provided that: (a) such shares are listed on the TSX; (b) at any time during the 60 month period beginning at that time the non-resident, persons not dealing at arm's length with the non-resident or the non-resident together with such persons have not owned 25% or more of the issued shares of any class or series of the capital stock of COSL; and (c) the shares are not otherwise deemed to be taxable Canadian property under another provision of the Tax Act.
Premium Dividend, Dividend Reinvestment and Optional Share Purchase Plan
Please note that Canadian Oil Sands' premium distribution, dividend reinvestment plan and optional share purchase plan are currently suspended. A press release will be issued if the plan is re-instated.
Pursuant to the Conversion, the premium distribution, distribution reinvestment and optional unit purchase plan of the Trust (the “Trust DRIP”) and all associated agreements were assigned to COSL. COSL amended and restated such agreements so that the Trust DRIP continues in effect as the premium dividend, dividend reinvestment and optional share purchase plan of COSL (the “COSL DRIP”). Former Trust unitholders who were enrolled in the Trust DRIP at the effective date of the Conversion will continue to be enrolled in the COSL DRIP in respect of their COSL Shares upon the exchange of their Units for COSL Shares. Shareholders will not be entitled to receive any dividends under the COSL DRIP until they have exchanged their Units for COSL Shares.
What is the Premium Dividend, Dividend Reinvestment and Optional Share Purchase Plan?
The COSL DRIP enables holders of COSL Shares to:
(i) accumulate additional COSL Shares by electing to reinvest dividends in additional COSL Shares at 95% of the Average Market Price (as described in the COSL DRIP);
(ii) receive, in lieu of a declared cash dividend, a premium cash payment equal to 102% of such declared dividend by electing to reinvest the dividends in additional COSL Shares and directing the agent under the COSL DRIP to deliver those additional COSL Shares to a designated broker in exchange for the premium cash payment (as described in the COSL DRIP); and
(iii) if a holder of COSL Shares elects to participate in either the premium dividend component or the dividend reinvestment component of the COSL DRIP, then such Shareholder will also be able to purchase additional COSL Shares through the optional share purchase component of the COSL DRIP by directly investing additional amounts within the limits established by the COSL DRIP (as described in the COSL DRIP).
Shareholders in Canada are eligible to participate in the COSL DRIP. Shareholders who are not resident in Canada are not eligible to participate in the premium dividend component or the optional share purchase component of the COSL DRIP.
COSL Shares Acquired and Disposed of under the DRIP
A Shareholder’s reinvestment of dividends pursuant to the dividend reinvestment component or premium dividend component at 95% of the Average Market Price, should not, pursuant to the administrative practices of the Canada Revenue Agency (“CRA”), result in the Shareholder realizing a taxable benefit under the Tax Act.
The cost of COSL Shares acquired pursuant to the dividend reinvestment component or premium dividend component of the COSL DRIP will generally be 95% of the Average Market Price for that dividend payment date while the cost of COSL Shares acquired pursuant to the optional share purchase component of the COSL DRIP will be equal to the Average Market Price on the relevant date. Where such COSL Shares are held as capital property of a Shareholder, the adjusted cost base at a particular time will be the average cost of all COSL Shares owned by the Shareholder at that time, whether acquired through the dividend reinvestment component, the premium dividend component, the optional share purchase component or otherwise acquired outside the COSL DRIP.
The premium dividend will not be considered a dividend for the purposes of the Tax Act, but will represent proceeds of disposition.
Where a Shareholder has not made the irrevocable election permitted under subsection 39(4) of the Tax Act to treat his or her COSL Shares and any other “Canadian security” (as defined in the Tax Act) as capital property, the CRA may take the position that any COSL Shares acquired and sold by the Shareholder pursuant to the premium dividend component of the COSL DRIP are held in the course of an adventure or concern in the nature of trade or as inventory and not capital property, such that the tax consequences of the Shareholder’s sale of COSL Shares pursuant to the premium dividend component will not be considered a capital gain or loss. In such circumstances a Shareholder may be considered to realize a profit equal to the amount of the premium dividend and should consult his or her own advisors with respect to the computation of such amount, reporting obligations and any tax liabilities.
Where a Shareholder disposes of COSL Shares (including dispositions pursuant to the premium dividend component) that are held as capital property he or she will generally realize a capital gain (or loss) on the disposition of the COSL Shares equal to the amount by which the proceeds of disposition are greater (or less) than the Shareholder’s adjusted cost base of such shares plus any reasonable costs incurred by the Shareholder in connection with the disposition.
The reinvestment of dividends under the COSL DRIP (including those resulting in receipt of cash from the premium dividend component) does not relieve a non-resident Shareholder from any liability for income taxes that may otherwise be payable on such amounts. In this regard, a non-resident Shareholder who participates in the dividend reinvestment component or premium dividend component will be treated, for tax purposes, as having received, on each dividend payment date, a taxable dividend equal to the amount of the dividend payable on such date, which dividend will be subject to Canadian withholding tax at the rate of 25% unless the rate is reduced under the provisions of a tax treaty between Canada and the non-resident Shareholder’s jurisdiction of residence. Where the non-resident Shareholder is a United States resident entitled to benefits under the Canada-United States Income Tax Convention, 1980 and is the beneficial owner of the dividends, the rate of Canadian withholding tax applicable to dividends is generally reduced to 15%.