Questions and Answers about Demutualization
How will I be taxed on my demutualization benefits?
If you receive a share, there is no immediate tax consequence. The adjusted cost base of the share is zero. However, when you sell or dispose of the share, you may have a capital gain.
If you receive a benefit other than a share (for example, cash), it will be taxed as a dividend. You will have to include the taxable amount of the dividend in your income. The taxable amount of eligible dividends is 138% of the amount of the dividends you receive. The taxable amount of dividends other than eligible dividends is 117% of the amount of the dividends you receive. You will also qualify for the dividend tax credit. For more information on dividends, see Line 12000 - Taxable amount of dividends from taxable Canadian corporations.
How do I report my income from demutualization?
If you receive a share, you do not have to report any income until you dispose of the share. When you dispose of the share, you may have a capital gain. This gain is the difference in the proceeds of disposition and the adjusted cost base (ACB) of the share. The proceeds of disposition is generally the selling price of the share. Since the ACB of a share you receive because of demutualization is zero, your capital gain will equal your proceeds of disposition. Use the inclusion rate in effect for the year of disposition to determine your taxable capital gains or allowable capital losses.
If you receive a dividend (cash), include the taxable amount of the dividend (see above) in your income for the year that you received it. You also can claim the dividend tax credit.
When do I pay tax on my demutualization benefits?
When you pay tax will depend on the type of benefit you receive. If you receive a dividend (cash), you have to pay tax on this dividend in the year you receive it. For example, if you receive the dividend in 2020, you report it on your 2020 income tax and benefit return.
If you receive a share, you do not pay tax until the year that you actually sell or dispose of the share.
How much tax will I have to pay?
The amount of tax that you have to pay will depend on your tax situation in the year you receive the dividend or sell the share. There is no flat rate of tax on these demutualization benefits.
What are the tax consequences of receiving demutualized benefits?
When you report dividend income or a taxable capital gain, your net and taxable income will increase. This may reduce benefits and credits that you may receive, such as the Canada child tax benefit, the goods and services tax/harmonized sales tax credit, provincial/territorial family benefits, provincial/territorial tax credits, and some non-refundable tax credits, such as the age amount, spousal amount, and medical expenses. It may also increase your federal and provincial taxes and you may have to pay minimum tax. You may also have to repay part or all of any employment insurance or old age security benefits you received in the year.
To find out more about income-tested benefits, minimum tax, and repaying employment insurance or old age security benefits, see the Federal Income Tax and Benefit Guide.
Do I need a special form to report demutualization benefits?
If you receive a share, you will have to report your capital gain when you dispose of the share. To do this, you will need to complete Schedule 3, Capital Gains (or Losses), and file it with your return. This schedule is included in the forms booklet. For more information, see How do you calculate and report capital gains or losses when you redeem units or shares?
If you receive a dividend (cash), your insurance company will send you a T5 slip, Statement of Investment Income. The slip will indicate the taxable amount of dividend income paid to you. It will also indicate the amount of the dividend tax credit that you can claim. You can find reporting instructions on the back of the T5 slip.
Is there a guide that explains how to report this income?
You can find information on how to report dividend income and capital gains in the Federal Income Tax and Benefit Guide. The CRA's Capital Gains section and Guide T4037, Capital Gains have more detailed information on capital gains.
Will I receive a reminder that I have to report this income?
If you receive a dividend (cash), your insurance company will send you a T5 slip, Statement of Investment Income. You should get this slip by the end of February following the year in which you receive the dividend.
If you receive a share, no information slip will be sent to you. It will be your responsibility to calculate and report the capital gain on your return for the year in which you dispose of your share.
I received my demutualization benefits in shares. Later, I bought more shares in my insurance company. Do special rules apply?
Yes. Shares in the same company are considered to be identical properties, and special rules apply when you calculate the adjusted cost base. To find out about these special rules, see Identical properties.
I am planning to give my shares to a charity. Do I still have to pay tax?
If you donate shares or certain other types of capital property to a registered charity, the inclusion rate may be reduced to zero on the capital gain arising from the donation. For more information, see Capital gains realized on gifts of certain capital property.
If I give the shares to my son or grandchild, will I have to pay tax?
If you give your shares to a relative as a gift, the CRA considers you to have sold the shares. For more information, see Other transfers of property.
I make instalment payments. Will demutualization benefits affect my instalments?
Demutualization payments may affect your instalment amounts. For more information, see Paying your income tax by instalments.
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