Tax Treatment of the TC Energy / South Bow Spin-Off

TC Energy Corporation (TSX: TRP) completed a spin-off of South Bow Corporation (TSX: SOBO) on the record date of October 1, 2024.  TC Energy shareholders received 0.2 shares of South Bow for each shares of TC Energy held on the record date.

TC Energy published a Management Information Circular document highlighting the tax treatment of the transaction for Canadian shareholders.  The details are provided on page 33:

In general, a Resident Shareholder who holds TC Energy shares, and any New TC Energy Common Shares and South Bow Common Shares received pursuant to the Arrangement, as capital property will not realize a capital gain or capital loss for purposes of the Tax Act as a
result of the transactions in the Arrangement. The aggregate adjusted cost base of the TC Energy shares for a Resident Shareholder will generally be allocated among the New TC Energy Common Shares and the South Bow Common Shares based upon the relative fair market values of such shares at the time of the Arrangement. Following the Effective Date, TC Energy and South Bow will advise shareholders, either by news release or on their websites, of their estimate of the appropriate proportionate allocation.

TC Energy has also published the following on their web site:

Resident shareholders should not realize a capital gain or capital loss as a result of the distribution. The adjusted cost base in TC Energy shares prior to the distribution is allocated based on the fair market values of TC Energy and South Bow immediately after the distribution. The allocation has been determined to be 91% to TC Energy common shares and 9% to South Bow common shares.

Canadian TC Energy shareholders will therefore not realize any immediate capital gain or loss as a result of the South Bow spin-off.  Rather, 9% of the ACB of TC Energy shares immediately prior to the spin-off should be reallocated to the new South Bow shares received.

How was the 91% / 9% ratio calculated?

This ratio was likely calculated based on the closing market prices of TC Energy and South Bow on October 1, 2024.  The closing price of TRP on October 1, 2024 was $59.49 and the closing price of SOBO on October 1, 2024 was $29.07.  Since TRP shareholders were due to receive 0.2 shares of SOBO for each share of TRP owned, the total fair market value per share of TRP corresponds to: $59.49 + 0.2 x $29.07 = $65.30.  The ratio allocated to the new SOBO shares could be calculated as: 0.2 x $29.07 / $65.30 = 8.9%.

Example

Let’s assume the following:

• A Canadian shareholder purchased 100 shares of TRP for $47.50 per shares with a commission of $10.00, settling on January 4, 2024.
• On October 1, 2024, the shareholder received 20 shares of SOBO (100 shares x 0.2) as a result of the spin-off.
• No other purchases or sales before the spin-off.

The ACB of the TRP shares following the purchase on January 4, 2024 can be calculated as follows:

Initial ACB of TRP shares = 100 shares x $47.50/share + $10.00 = $4,760.00 (or $47.60/share)

As a result of the spin-off, 9% of the ACB of the the TRP shares immediately prior to the spin-off should be allocated towards the newly acquired SOBO shares.

The ACB of the TRP shares therefore decreases by: $4,760.00 x 9% = $428.40.

ACB of TRP shares following the spinoff = $4,760.00 - ($4,760.00 x 9%) = $4,331.60 (or $43.32/share)

The initial ACB of the 20 newly acquired SOBO shares would be $428.40 in total (or $21.42/share).

Recording the Transaction on AdjustedCostBase.ca

This example can be recorded on AdjustedCostBase.ca as follows:

• A “Buy” transaction on January 4, 2024 for 100 shares of TRP for an amount of $47.50/share and a commission of $10.00 (corresponding to the initial purchase).
• A “Return of Capital” transaction on October 1, 2024 for a total amount of $428.40.
• A “Buy” transaction on October 1, 2024 for SOBO for 20 shares for a total amount of $428.40 and a commission of $0.00.

This appears as follows on AdjustedCostBase.ca:

Cash In Lieu for Fractional Shares

If you received cash in lieu of fraction shares of South Bow, you may treat this as return of capital.  The CRA‘s administrative practices allow you to reduce the ACB of the shares received by the cash received in lieu of fractional shares, provided that amount is less than $200.

In this case, the ACB of the TRP shares should be reduced by the full 9%.  However, the cash amount should be deducted from the total purchase amount of the SOBO shares.