Brookfield Infrastructure/Enercare -- summary under Exchangeable Units
Overview
On October 16, 2018, Brookfield Infrastructure acquired all of the 107M common shares of the Company (being all its shares) under a CBCA Plan of Arrangement. The consideration (aggregating C$4.3B) was C$29.00 per share, except that some of the Company shareholders elected to instead receive 0.5509 of an Exchangeable LP Unit of a subsidiary LP (“Exchange LP”) of Brookfield Infrastructure Partners L.P. (“BIP”) in exchange for each elected Enercare common share (with a total of 5.7M Exchangeable LP Units being issued). BIP is a Bermuda exempted limited partnership whose units are listed on the TSX and NYSE, and is not a SIFT partnership given that it is not a Canadian resident partnership.
Each Exchangeable LP Unit is exchangeable for one non-voting limited partnership unit of Brookfield Infrastructure Partners L.P. ("BIP Units"). Exchange LP, although a SIFT partnership, is not expected to be subject to significant SIFT tax as it will mostly hold Canadian shares. Those who received Exchangeable LP Units have 75 days from the Arrangement Date to submit the relevant information for making an s. 97(2) election to Exchange LP through the applicable website. Exchange LP may elect to redeem its Exchangeable LP Units after seven years.
Company
The Company is a leading provider of water heaters, water treatment solutions, furnaces, air conditioners and other HVAC rental products, plumbing services, protection plans and related services, with operations in Canada and the United States. 107,478,630 Common Shares (and no preferred shares) are issued and outstanding. The directors and Executive Officers and a former director and officer of the Company, and their associates, beneficially own, control or direct, directly or indirectly, an aggregate of 876,461 Common Shares.
Purchaser
Purchaser is a corporation incorporated on July 30, 2018 under the CBCA and is a wholly-owned subsidiary of, and controlled directly or indirectly by, the Brookfield group.
BIP
Brookfield Infrastructure Partners L.P. is the flagship listed infrastructure company of Brookfield Asset Management Inc., a global alternative asset manager with approximately US$285 billion of assets under management. BIP is a Bermuda exempted limited partnership and a substantial portion of its assets is located outside the U.S. and Canada. The BIP Units are listed on the NYSE and TSX.
Exchange LP
Exchange LP will be established prior to the Effective Date, as an Ontario limited partnership controlled directly or indirectly by BIP. The capital of Exchange LP will be as follows: (i) general partnership units; (ii) class A limited partnership units ("LP Units"); and (iii) class B exchangeable limited partnership units ("Exchangeable LP Units"). An indirect newly formed subsidiary of BIP will be the general partner ("Exchangeable GP") and another indirect subsidiary of BIP ("LP Co") will be the limited partner. Each of Exchange GP and LP Co will at all times be residents of Canada for the purposes of the Tax Act.
Exchangeable LP Units
The Exchangeable LP Units are Class B limited partnership units of Exchange LP that will provide the holder with economic terms that are substantially equivalent to those of BIP Units and will provide for the Exchange Right. The Exchange Right is the right of a holder of Exchangeable LP Units to receive one BIP Unit for each Exchangeable LP Unit held by causing Exchange LP to redeem the Exchangeable LP Units, in accordance with the terms and conditions of the Exchange LPA. Prior to the seventh anniversary of the Effective Date, Exchange LP may elect to redeem Exchangeable LP Units in limited circumstances, and Exchange LP may redeem the Exchangeable LP Units in any circumstances on or after the seventh anniversary.
Unit Election
Each Canadian Shareholder may elect: to receive from the Purchaser the Cash Consideration for each of its Common Share; or to receive from Exchange LP (A) the Unit Consideration for each of its Common Shares, or (B) the Unit Consideration per Common Share for certain of its Common Shares and the Cash Consideration per Common Share for the balance of its Common Shares (a "Unit Election").An Electing Canadian Shareholder can elect for a portion of the amount payable under the Arrangement as Cash Consideration and a portion as Unit Consideration. An Electing Canadian Shareholder will not be eligible to exchange its Exchangeable LP Units for BIP Units if such Electing Canadian Shareholder resides in the U.S.
Plan of Arrangement
- The Purchaser shall make a non-interest-bearing demand loan to the extent required by the Company to make the payments in 2 below.
- Each Company Option, DSU and PSU shall be deemed to be assigned and transferred by its holder to the Company in exchange for a cash payment from the Company.
- Common Shares of Dissenting Holders shall be deemed to have been transferred to the Purchaser.
- Each remaining Common Share other than of Electing Canadian Shareholders shall be assigned and transferred to the Purchaser for the Cash Consideration of $29.00, less applicable withholdings.
- Each Common Share of an Electing Canadian Shareholder shall be deemed to be assigned and transferred by the holder thereof to Exchange LP in exchange for 0.5509 of an Exchangeable LP Unit.
Canadian tax considerations
BIP
BIP is not a "SIFT partnership" as defined in s.197(1) based on the understanding that BIP is not a "Canadian resident partnership."
Cash consideration
A Resident that receives Cash Consideration from the Purchaser in exchange for its Common Shares under the Arrangement will realize a capital gain (or a capital loss) equal to the amount by which the aggregate cash payment exceeds (or is less than) the aggregate of the adjusted cost base to the Resident Holder of such Common Shares and any reasonable costs of disposition.
Exchangeable unit consideration
A Resident Holder who is an Electing Canadian Shareholder may choose to defer all or a portion of any capital gain that would otherwise be realized on the exchange of Common Shares for Exchangeable LP Units or (in the case of proration or a Partial Unit Election) for Exchangeable LP Units and cash from Exchange LP pursuant to the Arrangement by filing with the CRA (and, where applicable, with a provincial tax authority) a joint election (the ''Joint Tax Election'') under s. 97(2). To make a Joint Tax Election, an Electing Canadian Shareholder must provide the relevant information to Exchange GP through a website that will be made available for this purpose. The relevant information must be submitted to Exchange GP through the website on or before the day that is 75 days following the Effective Date.
Exchange LP
As a ''SIFT partnership'', Exchange LP will be subject to partnership level taxation on its ''taxable non-portfolio earnings.'' Exchange LP is not expected to earn any material income other than taxable dividends from shares of taxable Canadian corporations held by Exchange LP, so that it is not expected to be liable for any material SIFT Tax.
Non-residents
A Non-Resident Holder will not be subject to tax under the Tax Act on any capital gain, or entitled to deduct any capital loss, realized on the disposition of Common Shares to the Purchaser for cash consideration under the Arrangement unless such Common Shares constitute "taxable Canadian property."
U.S. tax considerations
The exchange by U.S. Holders of their Common Shares for cash pursuant to the Arrangement will be treated for U.S. federal income tax purposes as a taxable sale by U.S. Holders of their Common Shares for cash. As a result, U.S. Holders will recognize gain or loss in an amount equal to the difference, if any, between (a) the U.S. dollar value of the Canadian currency received by such U.S. Holder in exchange for such U.S. Holder's Common Shares (other than amounts, if any, that are or are deemed to be interest for U.S. federal income tax purposes, which amounts will be taxed as ordinary income) and (b) the adjusted tax basis of such U.S. Holder in such Common Shares.
The Company believes that it was not a PFIC during its taxable year ended December 2017 and, based on its current operations and financial expectations, the Company expects it would not be a PFIC for its current taxable year if such taxable year were to end on the Effective Date.