As a result of new US reporting rules that came into effect on January 1, 2011, Canadian public and private issuers may be subject to a significant information reporting obligation when undertaking one of a wide range of transactions. The new rules are intended to increase compliance in reporting capital gains and losses for US tax purposes.

The rules require issuers of “specified securities” to complete an information return for any “organizational action” that affects the US tax basis of those securities. Specified securities currently include shares of a corporation or a Regulated Investment Company.

On January 1, 2013, or at a later date if determined by the IRS, specified securities will include notes, bonds, debentures, other debt, and certain commodities, contracts or derivatives with respect to commodities, or financial instruments.

IRS reporting rules

Organizational actions that trigger the reporting requirement may include transactions such as mergers, acquisitions, stock splits, stock redemptions, distributions in excess of US earnings and profits, and similar transactions and events.

Issuers can avoid the reporting requirement where each of the issuer’s security holders is an “exempt recipient.” Exempt recipients include foreign (i.e., non-US) holders, corporations, and US tax-exempt entities. However, this exemption is generally only available if the issuer has obtained completed exemption certificates from security holders.

When reporting is required, issuers must complete the information return, and either mail a copy of the form to the IRS and to each security holder (other than exempt recipients), or post a copy of the return on the issuer’s public website for a period of ten years. The information sought in the return includes details about the organizational action and its quantitative effect on the tax basis of the specified security.

Issuers who fail to comply with the new rules may face significant penalties of up to US$3 million (higher if the rules are intentionally disregarded).

Given that the effect of a particular transaction on the US tax basis of securities is not always apparent, issuers (particularly non-US issuers) may find it difficult to identify when these rules apply and to subsequently comply with them. Accordingly, issuers should seek appropriate legal advice when necessary.

For further details on these reporting rules, please see Norton Rose Canada’s full legal update on the topic.