Q&A

Your questions answered

Great West Lifeco

Perhaps you can tell me what happened to the price of shares in Great West Lifeco on the New York Stock Exchange? They were quoted at 50 Canadian dollars some time ago and are now at Can$25. Did I miss something? Mr P.O'L., Dublin

I'm afraid you did, but rest easy, it has not left you at a disadvantage. As you say, the shares in Great West Lifeco have roughly halved in value in the past few months - a point of no little concern to those Canada Life members who took shares in Great West Lifeco when it took over their company.

The good news is that the price reduction is down to nothing more than a share split, announced by the company at the time of its last full-year results and voted on by shareholders on September 24th. Like many shareholders, the detail in the documents may have passed you by, but the end result was that the shares were split on the basis of two new shares for every old share on October 6th.

Share splits are regularly used by companies to improve the liquidity of stock. The argument runs that investors slow to pay say $20 for a single share might be more ready to pay $10 a share to get into the company, even if they are effectively only receiving half of what they would have got at the $20 price. Essentially, the high price scares off some potential buyers.

In the recent turbulent history of stock markets, there have not been too many shares splits but they were a regular feature of the market, including Dublin, in the 1990s.

For the record, Great West Lifeco trades on the Toronto Stock Exchange, not New York, which explains why it is quoted in Canadian dollars.

First Active shares

My query is in relation to First Active holders of purchased shares only and the capital reduction scheme in 2003. I bought shares in 1998 and am trying to compute the capital gains tax. Because of the capital reduction scheme in 2003, which paid a lump sum of €1.12 per ordinary share held, the original allowable cost of the shares is affected.

Revenue says that in the capital reduction, two shares were offered for every ordinary share held so that two-thirds of the original allowable costs are used against these shares and only one-third against the original purchase. The effect of this is a capital loss against the 2003 payment.

This does not seem correct. They seem to be saying that if the company was worth €300 million say, then the capital reduction reduced the value by €200 million. In fact the actual reduction was more like 20-25 per cent of the company's value. The share price at this time was around €4 and the shares in the capital reduction had a nominal value of €0.56.

The capital payment in 2003 was exactly one-third of the original value of my shares, which each cost €3.36. Therefore, the original cost should be split more like three-quarter on original shares and one-quarter against the capital payment.

The Revenue's website has one example on this but it is not clear. Can you verify if their split is correct as it increases the tax liability considerably?

Ms S.M., Dublin

We are getting perilously close to the deadline on payment of capital gains tax due on the takeover of First Active and, as this letter indicates, there are still a number of very confused investors out there. I have read the documents throughout the life of First Active, including the capital reduction programme, and to be fair, they do make sense. However, a member of the accountancy firm involved in the capital reduction programme still had to talk me through exactly what happened and how it impinged on shareholders. So the confusion is small surprise to me and, if nothing else, gives some indication of the lack of understanding by many investors of the products into which they are putting their money.

In this instance, you are getting caught up in the face value of the shares at the time of the capital reduction when the more fundamental point is what happened the shares at that time. This is very simple. Effectively, every single share held in First Active was divided into three. Two of these were then cancelled and a payment of 56 cents for each of them was passed to the investor in cash.

The key point is that each share was subdivided into three. If the share was subdivided, then, clearly, so too must the price originally paid for them. This means that, of the €3.36 paid for the shares, €1.12 is the "new" allowable cost of the original purchase against the €6.20 per share takeover price paid by Royal Bank of Scotland.

The bottom line, not surprisingly, is that the Revenue was correct. Of course, you will be allowed to index the value of that €1.12 from the purchase in 1998 up to the end of 2002 when indexing was abolished. This will effectively raise the "allowable" purchase price per share to €1.295.

Then there is the loss incurred on the other two-thirds of your original share at the time of the capital reduction programme. As stated above, each third of the original share purchased at €3.36 is now worth €1.12. However, you received just half of that, 56 cents per share in the capital reduction programme. So, you have a capital loss on that exercise of 56 cents per share, or €1.12 per each of the number of shares originally bought.

Once you have indexed the original purchase price and then offset your residual loss from the capital reduction programme, you should also discount the €1,270 capital gains tax relief for gains made this year before assessing what tax is owing to the Revenue.

But do it quickly. Anyone missing the October 31st deadline for payment of tax runs the risk of interest charges on their debt.

Thanks for the worked examples regarding capital gains tax on Eircom and First Active transactions. While I can't say it made things simple, at least the maths made sense. It may be worth pointing out to your readers that when the capital gains from the First Active acquisition arises from an initial joint account in First Active, then this can be apportioned among all the accountholders of the joint account and an annual allowance of €1,270 can be availed of by each of those joint accountholders.

Mr J.McL., email

As you say, the double exemption may prove helpful to some readers but not all. According to the Revenue, the only people entitled to avail of the double exemption - apart from those who hold the shares themselves in joint names - are those who received the shares free in relation to either a joint investment account or a housing loan in which each person named had a beneficial interest.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.