ACB calculations

[runningman]

If you receive cash distributions from the likes of XIU & XIC, does this affect your adjusted cost base? I was under the impression it didn't, but then I read this from the iunits faq:

19. Will I/Why don't I actually receive additional units in my account when the distribution is re-invested?
Immediately following the re-investment of the distribution in additional units, BGI Canada consolidates the units outstanding such that the number before and after the distribution is the same.

Because of the consolidation, you will not receive additional units in your account. The net effect of the distribution is to pass taxable income from the fund through to the unitholders. In addition, the unitholder's average cost base for the units increases by the amount of the distribution. This reduces realized gains when you sell your units.

[Bylo Selhi]

If you receive cash distributions from the likes of XIU & XIC, does this affect your adjusted cost base? I was under the impression it didn't, but then I read this from the iunits faq:

They're two different things. The cash distributions you get are in respect of dividends that the underlying stocks throw off. These payments are eligible for the dividend tax credit (Canadian stocks only) as shown on the T-slip you get once a year. These payments do not affect your ACB.

The second distribution is in respect of capital gains that accrue as the ETF sells stocks when the index is reconstituted. This involves no direct cash payment to you and no purchase/sale of additional units. It's an internal bookkeeping that's intended to ensure that the same number iUnits remain outstanding after they pass on taxable capital gains to you. The effect is similar to the reinvestment of distributions in a conventional open-end fund, except that there is no change in the number of units you own. You have to increase your ACB accordingly because you'll be paying CG tax on the amount now and you don't want to pay it again when you sell units of the ETF.

[ward]

Maybe worth mentioning is the dribble of "return of capital" involved here, which also should be accounted for in calculating ACB.

[runningman]

If you receive cash distributions from the likes of XIU & XIC, does this affect your adjusted cost base? I was under the impression it didn't, but then I read this from the iunits faq:

They're two different things. The cash distributions you get are in respect of dividends that the underlying stocks throw off. These payments are eligible for the dividend tax credit (Canadian stocks only) as shown on the T-slip you get once a year. These payments do not affect your ACB.

The second distribution is in respect of capital gains that accrue as the ETF sells stocks when the index is reconstituted. This involves no direct cash payment to you and no purchase/sale of additional units. It's an internal bookkeeping that's intended to ensure that the same number iUnits remain outstanding after they pass on taxable capital gains to you. The effect is similar to the reinvestment of distributions in a conventional open-end fund, except that there is no change in the number of units you own. You have to increase your ACB accordingly because you'll be paying CG tax on the amount now and you don't want to pay it again when you sell units of the ETF.

Thanks again Bylo. So just that I have this straight:

In my summary, I received 3 types of distributions

1. Capital gains
2. Dividends
3. Return of capital

It is only (1) and (3) That effect my ACB. (provided dividends are distributed in cash) Have I got it?

[Bylo Selhi]

Have I got it?

By jove,...!

BTW, starting this year you'll see ROC on your T-slips. (In the past you had to depend on your broker or BGI to tell you the amount.) As ward said, you have to account for that in your ACB. ROC decreases your ACB. (Until your ACB becomes zero. Then it's taxed as a CG.)

[runningman]

Thanks bylo! Yeah, I've been tracking my acb incorrectly for a few years, but I've got it all straight now.

[marcharry]

So- what would the actual entry be to account for the capital gains?

Buy additional shares X (as reported) at $Y (as reported) - does BGI report it like that?

[Bylo Selhi]

Buy additional shares X (as reported) at $Y (as reported) - does BGI report it like that?

The number of shares remains the same. Just increase the ACB by the amount of the CG as reported to you by BGI or your broker.

We just got the T-3 and Summary of Trust Income for XIU from TD WH. The T-3 breaks out capital gains (box 21), actual amount of dividends (box 23) and return of capital (box 42.) You add CGs to, and subtract RoC from, your ACB.

[dagan]

[Restored from backup 2006-07-18]

I basically agree with what is written here, but it might be helpful to add that the best way to think of this is:

1. Cash distributions reduce your ACB. Think of cost that you paid and now you are getting cash back.

2. Any respective amount included in income increases your ACB. You are paying the tax on this now, at whatever inclusion rate, therefore you add it to ACB to not pay tax on that portion when sold. Be careful that you are including it at the proper rate. You do this whether you get a T-Slip or not. Think of this as an additional cost.

SUMMARY: receipts reduce your cost and outlays increase your cost.

I often hate to try to simplify taxation because it can be very complex and specific. ACB calculations can get very complex with specialty dividends and deemed inclusions. But I find it helpful as a general guide to think of it as above. If cash dividends = your T-Slip, then the net will be zero but it is still helpful to keep the above in mind. If 1 and 2 are not equal then you may be in a return of capital situation or paying tax on non-cash distributions.

For the accountants out there, they may recognize this as a form of equity accounting.

[Gus]

Ignorant question arising from the discussion above:

I have always assumed that the broker will keep track the ACB for tax reporting purposes. The only reason the investor needs to calculate this is to forecast CG tax and to check that the broker is doing its sums right.

Is this correct?

[Bylo Selhi]

I have always assumed that the broker will keep track the ACB for tax reporting purposes.

Brokers are not required to do so. All they're required to do is report to CRA your sale and the amount of the proceeds.

Some provide ACB reporting as a value-add service, however, it's dangerous to rely on their numbers, especially if you transferred-in the securities from elsewhere. Also, if you own the same security at more than one broker and/or in more than one account, they won't know about the other holdings. When TD WH recently instituted ACB reporting, I found several errors in their records, some of which were substantially to my disadvantage. That may be why TD WH disclaimed all responsibility for the accuracy of their reports.

The only reason the investor needs to calculate this is to forecast CG tax and to check that the broker is doing its sums right. Is this correct?

Yup. The onus is on you -- not the broker -- to keep accurate ACB information.

[treetops]

Bylo, do I need to keep track of the ACB if I'm taking monthly amounts from Saxon High Income (mutual) Fund? Or is this record-keeping only needed for ETF's?

I must admit I've ignored any record-keeping on ACB for any of my ETF's.

thanks
Paul
p.s. all are at TDW. Will they be able to help me put this together?

[runningman]

Bylo, do I need to keep track of the ACB if I'm taking monthly amounts from Saxon High Income (mutual) Fund? Or is this record-keeping only needed for ETF's?

I must admit I've ignored any record-keeping on ACB for any of my ETF's.

thanks
Paul
p.s. all are at TDW. Will they be able to help me put this together?

Absolutely, yes.

If your securities(stocks, ETF's, mutual funds) are held outside an RRSP (or RESP), the onus is on the individual investor to keep track of their ACB.

TDWH may be able to help in so far as you will have historical transaction records there.

[like_to_retire]

Or is this record-keeping only needed for ETF's?

You must understand the character of distributions from each type of security to know how it affects your ACB. It's necessary to keep track of ACB for every security you own. The only vehicle that you can ignore is cash and money market funds.

If you don't know your cost base, you won't be able to calculate the capital gain or loss when you sell. You don't want to pay tax twice, and you don't want to underpay your taxes. CRA frowns on the latter.

ltr

[Bylo Selhi]

Bylo, do I need to keep track of the ACB if I'm taking monthly amounts from Saxon High Income (mutual) Fund?

As others have already said, the short answer is yes and it applies to all securities held in a taxable account.

You might want to contact Saxon to see what info they have on your account. Some fundcos have detailed transaction records, in machine-readible form, going back a decade or more. This applies whether you held the fund directly with them or through a broker. If you bought the fund through TD and all transactions were done through them then their ACB should be accurate.

According to my CA, it's not unusual, especially with estates, for ACB info to be AWOL. In those situations, CRA will accept a "reasonable" estimate based on available evidence. That said, I still wouldn't count on their idea of reasonable to be "fair" nor would I use it as an excuse to not maintain accurate ACB data.

[treetops]

Thanks, Bylo.

P

[adrian2]

all are at TDW. Will they be able to help me put this together?

Absolutely, yes.

If your securities(stocks, ETF's, mutual funds) are held outside an RRSP (or RESP), the onus is on the individual investor to keep track of their ACB.

TDWH may be able to help in so far as you will have historical transaction records there.

Keep in mind TDW's algorithm to calculate the ACB is very primitive. It did not handle two of the most basic options events: an expiring naked put being assigned and converted into stock (stock's ACB was based on the strike price, no allowance for the put's original price) and a covered call expiring worthless (original call proceeds should have decreased the stock's ACB).

[treetops]

Adrian2, my situation should be straightforward. Each month, I withdraw a fixed $$$ amount from Saxon High Income on a systematic withdrawal plan. TDW set it up. The amount includes a percentage of return of capital.
So, each month, there is a redemption and a triggering of capital gains/losses.

How would you suggest I/TDW track this stuf re ACBf? Normally, I wouldn't know the capital gain/loss until the tax year is over, and certainly not for each month.

Thanks

Paul

[adrian2]

How would you suggest I/TDW track this stuf re ACBf? Normally, I wouldn't know the capital gain/loss until the tax year is over, and certainly not for each month.

I have all my transactions in Quicken, so I do know all my capital gains and losses as the trade is reported.

If I were you, I would do the same: gather past years' trading summaries from TDW and enter them. How bad can it be? At 30 secs per trade, an hour of your time is 120 transactions. Do you have much more than that?

Adrian

[Raul]

For those of you who have accounts with E*Trade, have you received your 2004 T3 slips? I've received T5s for both US and Cdn $ accounts but no T3s.

Couldn't find anything on their website that indicates as to when the T3s will be mailed out.

[Bylo Selhi]

Couldn't find anything on their website that indicates as to when the T3s will be mailed out.

T3s for income trusts don't have to be sent out until the end of March. I've received some of mine already but not all. (TD WH e.g. sends them out in two batches, one at the end of February and then at the end of March.)

That only leaves 3 to 4 weeks to complete and file a return by the end of April. I've not seen anything from CRA about extensions due to late arriving T-slips. (I suspect the party line would be to file as best you can by 30April, then do a T1ADJ when the straggling slips arrive.)

[like_to_retire]

That only leaves 3 to 4 weeks to complete and file a return by the end of April

I usually complete my tax return after the TD February T3's are sent out. This then only leaves the end of March slips for Income Trusts to enter.

When I receive that, it only takes an hour or so to complete and then net-file the return. No problem making the deadline.

ltr

[like_to_retire]

I wouldn't know the capital gain/loss until the tax year is over, and certainly not for each month.

That's correct. It's convenient though, to make your year end paperwork a bit easier to keep track of your transactions each month, but for many types of securities, you have no idea about the tax character of distributions until they are released at year end. Only then do you find out what portion was ROC (which reduces your cost base) or income or dividend etc........ltr

[treetops]

I wouldn't know the capital gain/loss until the tax year is over, and certainly not for each month.

That's correct. It's convenient though, to make your year end paperwork a bit easier to keep track of your transactions each month, but for many types of securities, you have no idea about the tax character of distributions until they are released at year end. Only then do you find out what portion was ROC (which reduces your cost base) or income or dividend etc........ltr

The problem seems to be that TDW didn't issue a record of redemption to me each month as part of the sytematic withdrawal plan they set up. These records are mentioned in Saxon's FAQ's, so it looks like a call to Saxon tomorrow for background. According to Saxon, their redemption statements contain ROC so I should be able to get it for each month.

Thanks all

Paul

[DenisD]

Has anyone checked if TDW accounts for ROC correctly in their book value of income trusts? To me, it looks like they ignore it. Or maybe book value is not the same as ACB.