Irish shareholders have a range of options with the sale of Canada Life. Laura Slattery reports

Canada Life shareholders in Ireland have received a letter from the insurance company recommending that they approve its sale to Great-West Lifeco. But what does the transaction mean for the 25,000 Irish shareholders?

The majority of these shareholders were carpetbaggers who took out policies with Canada Life just 18 months before the company abandoned its mutual status and received free shares as part of its flotation in 1999.

They may now have to decide whether they want to hold on to their investment or cash it in.

Canada Life requires two-thirds of those who vote to approve the sale for it to go ahead and is confident that it will achieve that figure, despite the fact that Manulife, another Canadian life company whose hostile bid failed earlier this year, holds a 9.1 per cent stake.

Approval is easier to secure because it is a friendly bid: the failed hostile bid for the company by Manulife would have required two-thirds of all shareholders for the sale to go through.

The deadline for votes either in favour or against the offer is May 2nd. But even those who decide not to vote may eventually have to make some decision about what to do with their shares if the sale is approved.

If the bid is successful, shareholders will receive further letters in June asking them to choose whether they want to receive cash, common shares (ordinary shares), preferred shares or a mix of the three in exchange for Canada Life shares.

Great-West is buying Canada Life with a mixture of cash and its own shares.

As the cash available is limited to 60 per cent of the offer, this means that if more than 60 per cent of Canada Life shareholders opt for a cash payment, they could find their cash sum being scaled back on a pro-rata basis, with some of their holdings being paid in Great-West shares.

Canada Life is advising Irish shareholders that they should state a preference for how they want to be paid, as otherwise they will simply receive a combination of whatever is left over.

Mr Peter Mitchell, Canada Life's associate director for marketing, says he suspects that most of the ex-carpetbaggers will head for the cash in the event the sale goes ahead. However, opting for cash will give rise to a capital gains tax bill.

Capital gains tax is applied when profit is realised in any given year on an asset and is set at a rate of 20 per cent. The tax applies to gains that exceed €1,270 - the current annual tax-free exemption allowance granted to individuals.

The Canada Life carpetbaggers have made significant gains as a result of keeping a keen eye on mutual companies likely to float. The launch share price in November 1999 was 17.50 Canadian dollars, while Great-West is now bidding Can$44.50 (€28.41) a share.

Any policyholder that acquired free shares at the time of flotation will be liable for capital gains tax on the full amount, after the annual allowance, unless they can offset the gain with a loss on another share.

Mr Mitchell says the average Irish shareholding is 250 shares, which means the average Irish shareholder has seen the value of their shares rise from a total of Can$4,375 to Can$11,125. At current exchange rates, this equals a rise from around €2,780 to €7,070, or a gain of €4,290.

Presuming that individuals' allowances have not already been used up and shareholders cannot offset their gains with losses made elsewhere, this could lead to a potential capital gains tax bill of €600 for people who paid for their shares and €1,160 for people who got them free.

Many of the carpetbaggers will hold fewer shares. All holders of Canada Life policies who qualified for shares received at least 155 shares, worth €1,715 at the time. On the basis of the Great-West deal, these shares could be worth around €4,385, a gain of €2,670.

The potential capital gains tax bill here would be less than €300 in normal circumstances, but around €620 for people who received their shares free.

There is a small allowance for indexation and for the cost of purchase of the shares, if any.

"If someone has incurred losses on shares they already have, they may go for the cash and offset that loss, but others might roll it over into common shares," says Mr Mitchell.

Each common share entitles the holder to one vote at shareholder meetings. Holders of common shares receive dividends, but in the event that a company is wound up or dissolved, they are the last in line to be paid.

Returns on preferred shares are fixed by a dividend rate. Holders of preferred shares receive preference over holders of common shares both for dividend payment and claim on assets in the event of liquidation.

Some preferred shares are cumulative. This means that if a dividend is not paid, it accumulates and must subsequently be paid before the dividends of common stock. However, the Lifeco preferred shares on offer are not cumulative.