Q&A

There are many Irish shareholders faced with the imminent question of whether to cash in or change to Great West Lifeco shares.

Canada Life

This may be a simple decision if there was only one option. In this case, there are three share options: (a) Lifeco common shares, (b) Lifeco Series F shares or (c) Lifeco Series E shares.

What are the differences between these shares and is one preferable over another?

Mr P.C., e-mail

The structure of the deal under which Great West Lifeco has bought Canada Life means that Canada Life will be paid through a mix of cash and the three different categories of share mentioned above.

There are more than 25,000 Irish shareholders in Canada Life and they have until next Thursday (July 3rd) to indicate their preference in terms of payment for their shares. The average payout for Irish shareholders will be 7,200.

Shareholders can opt for payment in cash and/or shares. The situation is that cash comprises only 60 per cent of the sale price and if holders of more than 60 per cent of the stock look to take the cash option, there will not be enough money to go around. In that case, Great West will have to spread the cash evenly among those looking for it and make up the balance in shares under the various categories.

The balance of the purchase price comprises 29 per cent common shares and 11 per cent preference shares. All are traded on the Toronto Stock Exchange and will not be traded in Ireland or Britain.

The common shares are just normal shares and are traded in the same way AIB or, indeed, the old Canada Life stock was through the stock exchange.

The preference shares come in two forms - Series E and Series F shares - and each has different features, although, again, both are traded in Toronto.

The Series E shares carry a guaranteed dividend of 30 Canadian cents per quarter. They can be redeemed by the shareholder - i.e. sold back to Great West - after September 2013 for 25 Canadian dollars. Great West has the option of redeeming the shares itself from September 2009 but would have to pay a premium to do so.

The Series F shares also carry a guaranteed dividend this time of 37 Canadian cents a quarter. However, unlike the Series E shares, they are not redeemable by the shareholder. Only Great West can choose when to buy back the shares. This will happen not earlier than the end of September 2008 at which time the company would pay Can$26 per share and not later thathe end of September 2012 by which time the price will have fallen to Can$25 per share. In its characteristics, the Series F shares resemble very closely a corporate bond.

Obviously, the common shares can carry a dividend and, in the normal course of events, will do so but there is no guarantee of a dividend or the level at which it might be paid.

So what should people do? Essentially, it depends on their individual view of the merits of holding stock that cannot be traded close to home. Canada Life shareholders received their stock by virtue of being policyholders with the former mutual prior to its flotation. Many would not be active equity investors and, for these, the prospect of holding shares tradable only on an unfamiliar exchange and in a foreign currency might be sufficiently daunting for them to consider seriously opting for cash.

The simple rule is that an equity portfolio should be balanced and that investors should not dabble in companies, sectors or markets that they do not fully understand.

On that basis, unless there are good portfolio reasons for holding on to Great West stock, it is probably better for the majority of investors to take cash. This is not to predict how Great West will perform. It is, after all, a very large Canadian insurer, with strong exposure to the US, if not as strong a franchise in Europe. It is simply a case of avoiding the unknown unless there is good reason to act otherwise.

If you do decide to opt for shares, you will almost certainly get the form of payment you seek. Going for common shares allows you greater flexibility in judging when to sell and allows you unlimited exposure to any rise in the share price. On the other hand, you will suffer any fall in the price of the stock. You will also carry a currency risk as the shares are traded in Canadian dollars.

Those with less appetite for risk might opt for the preference shares, which carry guarantees on redemption and dividend. It all depends on your attitude to risk. Over time, equity markets as a whole tend to rise rather than fall, notwithstanding the performance of the past three years, but there is no such guarantee about the performance of individual stocks. Just ask those who invested in Elan at its peak.

But how about those shareholders who opt for cash and find themselves holding some stock of different classes? The company says it will offer an assisted share placement programme following completion of the deal.

Details of how it will operate are, as yet, unclear, although it will basically allow people sell their shares more readily and at a lower cost thamight be the case if they go through their own broker. However, it will probably entail the sale of all shares rather than just some of the individual holding, which might not be to the liking of people interested in taking a punt on the stock but limiting their exposure.

Gifting land to children

Last week, a reader enquired about capital gains being levied on land being passed to himself and his wife by her parents to allow them to build a home. They were concerned that capital gains would fall due on the land, despite the fact that the parents had already paid inheritance tax when his wife's grandmother bequeathed it to them.

I stated that capital gains would indeed be due and if the land is passed to both the reader and his wife, this is true.

However, several readers have correctly pointed out that the parents can avoid capital gains tax if they pass the site on purely to their child. Under section 603A of the 1997 Taxes Consolidation Act, a capital gains tax exemption applies in cases of land passed to children specifically for the purposes of building a home.

The reader's wife can subsequently pass the property into joint ownership with her spouse.

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.