Starting January 1, 2011, U.S. and non-U.S. corporate issuers of certain securities are subject to sweeping new U.S. information reporting obligations. Under these rules, Canadian public and private corporations that have “specified securities” outstanding will be required to file information returns reporting any corporate transaction (including many mergers, acquisitions, spin-offs, stock splits, redemptions and certain distributions) that affects a holder’s U.S. tax basis in such securities. Failure to comply with these reporting requirements may result in substantial penalties. Many corporate issuers may not be fully aware of these new obligations or adequately prepared to comply with the regime.
As part of the Energy Improvement and Extension Act of 2008, Congress enacted new Section 6045B of the U.S. Internal Code of 1986, as amended (the Code). Section 6045B generally requires U.S. and non-U.S. issuers of “specified securities” to provide information about any organizational action occurring on or after January 1, 2011 that affects the U.S. tax basis of such securities. This new reporting obligation is one component of a broader set of coordinated measures that are intended to enhance compliance by U.S. taxpayers in reporting taxable gains and losses for U.S. tax purposes.1
Who has a Reporting Obligation under Section 6045B?
The new reporting obligations under Section 6045B apply to any issuer of a “specified security” that engages in any organizational action that affects the basis of such specified security. The term “specified security” includes stock (or any interest treated as stock, such as an American Depositary Receipt) in a U.S. or non-U.S. entity that is organized as a corporation (or treated as a corporation for U.S. federal income tax purposes); any note, bond, debenture or other evidence of indebtedness (of both corporate and non-corporate issuers); and any commodity, commodity contract, commodity derivative or other financial instrument that the IRS determines should be subject to these rules. For 2011, however, the term “specified security” is limited to stock (or other interests treated as stock) issued by a U.S. or non-U.S. corporation (or entity treated as a corporation).2
Although not specifically defined, an organizational action that affects U.S. tax basis in a security could include a variety of common transactions, including mergers, acquisitions, spin-offs, stock splits, stock redemptions, distributions in excess of U.S. earnings and profits and other similar corporate events.
Failure to satisfy the reporting requirements (outlined below) may subject a corporate issuer to penalties, including penalties of $100 for each failure to report, up to a maximum annual penalty of $3 million.3 Importantly, an entity that acquires an issuer that has failed to comply with its Section 6045B reporting obligations must satisfy those obligations or it will be jointly and severally liable with the issuer for any applicable penalties.
What Information Is Required to be Reported?
If Section 6045B reporting applies to a transaction, the issuer is required to file a return with the IRS on or before the 45th day following the organizational action or, if earlier, January 15 of the calendar year following the date of the transaction. The following information must be provided:
(i) the name and U.S. taxpayer identification number of the reporting issuer,
(ii) the security’s CUSIP or other identification number,
(iii) the name, address, email and telephone number of a contact person at the issuer,
(iv) the nature and relevant date of the organizational action, and
(v) the quantitative effect of the action on the security’s U.S. tax basis in the hands of a U.S. holder, which must be reported as a per share adjustment to, or percentage of, old basis.4
In addition, the issuer is required to report this information to holders of the specified security or their nominee on or before January 15 of the calendar year following the date of the organizational action.
In lieu of direct reporting to the IRS and to security holders, an issuer may elect to post the return with the required information on the issuer’s primary public Web site by the deadlines described above for reporting to the IRS. If this option is elected, the posted information must remain accessible for 10 years.5
Exceptions to Reporting
Importantly, no reporting to the IRS is required if the issuer reasonably determines that all of the holders of the security are “exempt recipients.” Similarly, information is not required to be provided to security holders that are “exempt recipients.” For this purpose, an “exempt recipient” generally includes a corporation (or other entity treated as a corporation for U.S. tax purposes), a foreign holder and a tax-exempt organization. However, issuers must generally receive properly completed exemption certificates from the holders or otherwise be able to rely on certain limited presumption rules in order to determine that holders are exempt recipients. Under the current Treasury Regulations, it appears the existence of a single holder that cannot be determined to be an exempt recipient would cause an issuer to be subject to Section 6045B reporting.6
The wide range of corporate activities and transactions that could potentially trigger Section 6045B reporting will mean that corporations will need to be vigilant about U.S. tax matters on a continuous basis if they may have U.S. shareholders. This is particularly important since, in some cases, it will not always be self-evident to a Canadian corporate issuer that a particular corporate event has the potential to affect tax basis in its securities under applicable U.S. tax rules. For example, a distribution to shareholders that exceeds the corporation’s current and accumulated “earnings and profits” (as determined under U.S. tax principles) will generally result in a reduction in the U.S. tax basis of the shares on which the distribution is made. Any such basis reduction would be an organizational action subject to Section 6045B if the corporation has non-exempt recipients. As a result of Section 6045B, Canadian public and private corporations engaging in these and other transactions that impact U.S. tax basis may be confronted with new and formidable compliance obligations. These corporations should consider taking steps to establish (i) internal safeguards to identify transactions that could affect the U.S. tax basis of their stock, (ii) procedures for obtaining certification of, or relying on the presumption rules regarding, their shareholders’ status as “exempt recipients” and (iii), if necessary, procedures for preparing and relaying the required information to the IRS and shareholders on a timely basis.