Calculating Your Adjusted Cost Base With ETFs

Being a DIY investor is easy when all your accounts are tax-deferred. As the April 30 tax deadline approaches, pretty much all you need to do is gather your RRSP contribution slips. But if you have nonregistered accounts, things are more complicated, even if you’re a Couch Potato who uses ETFs and index funds.

To begin with, you need to report any income you received during the year. This part is relatively easy: in February or March you should receive a T3 slip that includes a breakdown of the type of income you’ve received from your mutual funds or ETFs: dividends, reinvested distributions, and interest income. Just enter these amounts in the appropriate boxes on your tax return and your software—or your accountant—does the rest.

If you hold US-listed ETFs, you’ll receive a T5 slip from your brokerage: Box 15 contains the amount of foreign dividends you receive, and Box 16 will indicate the amount of foreign tax paid. Dividends from US and international companies are fully taxable as income, but you can recover the withholding tax by claiming the foreign tax credit on your return.

But there’s more to the story than simply reporting income. You also need to report any capital gains you may have incurred by selling an ETF at a profit. Conversely, if you sold an ETF for less than you paid, you can claim a capital loss, which can be used to offset other gains. Your net capital gains are then taxed at half your marginal rate.

The problem is, if you sell an ETF and incur a gain or loss you don’t get a T-slip in the mail with that information: you’re responsible for doing the calculation and reporting it accurately on your tax return. This calculation is not easy, because you likely made more than one purchase of the ETF over many months or years, paying a different price each time. You also need to account for reinvested distributions, return of capital, and other factors. Only when you have determined your adjusted cost base (ACB) can you determine your true capital gain or loss.

If you have a large and relatively complex non-registered portfolio, it’s probably best to have an accountant or tax advisor do this for you. Another option is to use ACB Tracking, a website that does custom calculations for a modest fee. But if you’re a DIY investor who enjoys this sort of thing, we want to help. Justin Bender and I have co-authored a white paper called As Easy As ACB, which walks you through the process step-by-step.

We hope you’ll download the white paper and give us your feedback. Please remember it is not a substitute for professional advice, and you are responsible for ensuring the information you report on your tax return is accurate.

126 Responses to Calculating Your Adjusted Cost Base With ETFs

  1. Canadian Couch Potato April 9, 2014 at 11:48 pm #

    @Mark: Mutual fund companies are actually quite good about tracking ACBs. So if and when you are ready to sell your funds they should be able to provide you with an accurate book value.

  2. Michel April 28, 2014 at 3:45 pm #

    Quick question: for investor investing in a non-registered account, i understand that ACB need to be tracked, which involve keeping track of BUY, SELL and SPLIT. If there is no DRIP in place, does i also need to keep track of the ROC ?

    From what i understand so far, the tax breakdown of each distribution are disclosed at year end on the CDS Innovation website.I also see that tax breakdown is published for the whole year on various ETF provider website (ex: ROC of 0.00162 for the YEAR)
    Is there any walkthrough on how to enter this data in quicken ?

  3. Canadian Couch Potato April 28, 2014 at 4:30 pm #

    @Michel: Our white paper explains all these details. I’m not familiar with how one would track ACB with Quicken, but the paper describes how to do it with adjustedcostbase.ca and it’s fairly easy to set up a spreadsheet that does it.

  4. Jas May 31, 2014 at 11:37 pm #

    @CCP:
    When you say that mutual fund compagnies are quite good about tracking ACBs, does this apply to investors buying their mutual funds through discount brokerage accounts, like TDWaterhouse? I don’t think we get any kind of ACB tracking report when we buy TD eseries funds from a TDW account. Maybe this is different when you buy them through a TD Mutual Funds account?

  5. Canadian Couch Potato June 1, 2014 at 10:47 am #

    @Jas: In a brokerage account, the stated book value of your mutual funds should be equivalent to the adjusted cost base, and in my experience it usually is. Tracking ACBs in mutual funds is easier to do at the fund level. When mutual funds have realized capital gains they usually distribute them in the form of new shares with a corresponding decrease in NAV. ETFs cannot do this because it’s not possible to have fractional shares. So they increase the NAV (or pay the distribution in cash) and keep the number of shares the same. The effect is the same, but the recordkeeping is more difficult in the latter case.

  6. Jas June 1, 2014 at 3:30 pm #

    @CCP:
    Thanks for the explanation!

    So, I understand that the book value reportage in my brokerage account should be reliable for mutual funds because re-invested distributions will show as a DRIP transaction with new fractional shares which will be added to the book value.

    D0es that also mean that I don’t have to adjust the ACB for ROC distributions at the end of year like for ETFs?

    I saw the following exemple in a forum, which seems to indicate I should adjust the ACB for the ROC :

    http://www.financialwisdomforum.org/forum/viewtopic.php?f=32&t=115867#p491988

    “Here is a simple example, using an Equity mutual fund that pays a distribution only once per year. Let’s say you invest $10,000. In late December, the Fund calculates its income for the year from dividends and capital gains and maybe some distributions from REITs, less the fund’s management fee. It pays this income out to the unit holders. Let’s assume your share is $370 of income and $30 return of capital.

    If you take your distributions in cash, then they’ll send you a cheque for $400 and a T3 slip that lists your share of dividends, capital gains, etc totaling $370. (The other $30 is return of capital) On your tax return you’ll have $370 of income to report, and the Cost base of your units will be reduced by $30 to $9,970. If you turn around and use the $400 to buy more units, your cost base will rise by $400 to $10,370.

    If instead you have your distribution reinvested, then the calculation is:
    original cost base $10,000 + reinvested distribution $400 – Return of capital portion of distribution $30 = $10,370”

    http://www.financialwisdomforum.org/forum/viewtopic.php?f=32&t=115867#p491988

  7. Canadian Couch Potato June 1, 2014 at 6:49 pm #

    @Jas: You should expect to see a mutual fund’s book value adjusted for ROC automatically (if there is any). This should show up on your statements, so you can always check to make sure.

  8. Jas June 2, 2014 at 4:46 am #

    @CCP:
    Thanks. I will check on my TD e series T3 tax slip in the future to see if I ever get any return of capital in the future…the funds did not distribute any ROC in 2012/2013.

    Just to be safe, I guess it is always better to keep a record of the ACB for mutual funds, even if the book value reported by the brokerage is usually adequate:

    Jamie Golombek: Mutual Obligations –TaxTips for Mutual Fund Investors
    https://www.renaissanceinvestments.ca/en/jamie_golombek/fptt_series/docs/TaxTips4_Golombek_04282011.pdf

  9. Jas June 2, 2014 at 7:49 am #

    @CCP:
    With TD e series mutual funds, I get a T3 tax slip which tells me the tax breakdown of all distributions received during the calendar year (actually, distributions are only once a year with TD e series funds).

    With Canadian ETFs, you suggest to consult CDS innovation’s website to get the tax breakdown… but don’t you get all this information from your T3 tax slip at the end of the year like for mutual funds?

  10. Canadian Couch Potato June 2, 2014 at 7:54 am #

    @Jas: The T3 slip doesn’t tell you whether the distribution was reinvested or paid in cash, and that will affect the ACB adjustment. It also doesn’t tell you the timing of the distribution, which may be important if you didn’t hold the same number of ETF shares throughout the year.

  11. Jas June 2, 2014 at 8:17 am #

    @CPP:
    Okay, now I get it 🙂
    Thanks a lot for taking the time to answer almost all of your reader’s questions.

    I wonder if most ETF investors in Canada keep tracks of their ACB correctly…seems like a real hassle to me. I also wonder if that is it is one the of the *hidden* reason why DFA funds are very popular with index investing advisors (like PWL Capital), automatic contributions and easier ACB tracking must make their job much easier 😉

  12. Garret Fick July 3, 2014 at 11:40 am #

    In case it helps anyone, I posted online the spreadsheet I created to track my ACB. It does the same thing as adjustedcostbase.ca with a bunch of macros to help check for errors. It doesn’t cover splits.

    You are free to use if you like. Download from http://ficksworkshop.com/apps/155-acb-tracker

  13. Noelle December 17, 2014 at 5:24 pm #

    When does the new CDS tax breakdown information get posted? End of December? January?

    I’m trying to follow the white paper for the 2014 tax year but nothing is up yet.

  14. Canadian Couch Potato December 17, 2014 at 8:43 pm #

    @Noelle: The tax breakdown info can’t be finalized until December 31, and then it takes time to prepare the paperwork. Expect to see most of the updates in February. Note that CDS Innovations has redesigned its site and the link has changed. Here’s the new one:
    http://services.cds.ca/applications/taxforms/taxforms.nsf/Pages/-EN-LimitedPartnershipsandIncomeTrusts?Open

  15. Barbara December 17, 2014 at 9:07 pm #

    During 2014 I transferred several ETF’s and shares out of my RRSP and LIF to a non-registered account. Is it necessary to still calculate the ACB on each of these shares?
    Thanks

  16. Canadian Couch Potato December 17, 2014 at 9:19 pm #

    @Barbara: When transferring funds out of a registered account, the withdrawal is taxed as income, so the ACB is not relevant. But now that the securities are in a non-registered account you will need to keep track of the ACB going forward. Any capital gain that accrues from the date of the transfer to the date you eventually sell the the security would be taxable.

  17. Jas February 8, 2015 at 8:01 am #

    @CCP:

    What do do you think of this simplified method to calculated your ACB with ETF:

    1) You use the website recommended in your paper (adjusted adjustedcostbade.ca)

    2) You check your monthly discount broker report and you enter your buy and sell orders in the ACB website including transaction fees

    3) At the end of the year, you check your T3 report for every ETF you own

    4) You take the amount of “ROC” and retract it from the ACB (by entering one ROC transaction in the ACB website)

    5) You calculate : (total distributions shown on the T3) – (total of distributions that you were actually paid during that year). You enter this information in the ACB website as the total ammount of re-invested distributions.

    It seems a bit easier the checking the CDS innovation database very year, especially since I use a macbook and their exel sheets are not compatible with microsoft for mac OS..

    http://www.taxtips.ca/personaltax/investing/taxtreatment/etfs.htm

    “Reinvested Distributions from ETFs
    You probably won’t know that an ETF has “paid” reinvested distributions unless you do some checking. The amount of these distributions are not identified separately in a box on your T3, but the reinvested distribution per share might be detailed in the footnotes box. In order to determine the amount to use to increase your ACB, you will probably have to check the website of the ETF provider. In the distributions detail for the ETF, it will show the reinvested amount per share. Multiply this by the number of shares owned at the end of the year.

    Another thing that can be done is to compare the total of distributions that you were actually paid to the total of distributions shown on your T3. When totaling the distributions from the T3, include the actual amount of dividends, not the taxable amount. Any difference should match the total calculated using the reinvested amount per share from the ETF provider’s website.”

  18. Pierre February 25, 2015 at 10:54 pm #

    This post and the whitepaper has been very helpful. Thank you. Clearly, this part of tax season is complicated. What I don’t understand is if it’s so complex for the individual to calculate it correctly, how on earth does the CRA ever check if it’s done right?

  19. Randy March 20, 2015 at 1:15 am #

    For the 2014 tax year, I have a number of US equities that have produced foreign dividend income and I have received a T5 in $US. I need to report this income in $CAN and it would be impractical to calculate the exchange rate for each dividend transaction due to the number of transactions. Therefore, I would like to use the Bank of Canada average annual 2014 US-CAN exchange rate for the foreign dividend income.

    For the same tax return, I also have US securities sold in 2014 which produced capital gains. These transactions need to be converted to $CAN, and I believe I should convert foreign capital gains using the actual exchange rate for each buy/sell transaction. The account is in $US dollars which means no US-CAN exchange actually occurred on the day of the transaction, and so I plan to use the Bank of Canada noon rate for the day.

    Question: I have read I need to be consistent in my application of exchange rate for the tax year. By applying the average annual exchange rate to the dividend income, and the actual transaction exchange (noon) rate to the capital gains, could this be a potential problem for CRA using different methods? I would prefer to keep it simple and use the average annual exchange rate for both income and capital gains (for the gains, this also reduces taxes payable), but not sure this is allowed.

  20. Canadian Couch Potato March 20, 2015 at 8:48 pm #

    @Randy: I’m not sure the CRA’s direction this is crystal clear. It would be best to consult a tax specialist.

  21. Cristian April 26, 2015 at 11:35 am #

    Hi Dan,
    The As Easy As ACB white paper is crystal-clear, the problem is that the latest T3s I got for a couple of the ETFs I trade do not show the actual sums for the ROC, but the percentages. Moreover, the last distribution of the year does not have non-cash distributions and ROC in the same column, but there are two columns for the same date (30 Dec).
    I will use for example the T3 for ZDV.TO.
    The ROC is fairly simple to calculate: For example, distribution 3 on 28/3/2014 was of $0.062 Total income per unit, out of which 6.3262% was ROC. The last distribution of the year (30/12/2014) is the same.
    What happens, though, with the calculation for the reinvested capital gains?
    The numbers for distribution 13 (30/12/2014) are:
    Total non-cash distribution: $0.05008
    Total income per unit: $0.05008
    Capital gain: 89.4463%
    ROC: 10.5537%
    What are we supposed to do with these numbers?
    I could calculate the reinvested capital gains using the total non-cash distribution, as shown in the white paper. But it seems that 10% of that reinvested capital is actually ROC and it should be calculated as such.
    Am I getting this right?
    Thank you for any input.

  22. Canadian Couch Potato April 26, 2015 at 3:40 pm #

    @Cristian: This article should help:
    http://canadiancouchpotato.com/2014/04/07/tax-tips-for-bmo-etf-investors/

  23. Roy January 21, 2016 at 2:48 am #

    Regarding “reinvested capital gain distributions”, I see discussion about adding this to the ACB but no mention of declaring the capital gain itself on the tax return. Shouldn’t we be doing both (or neither)? Seems to me an easier way is just to ignore the whole thing and pay the tax man at the end … at least that is more fair than just cranking up the ACB in your favour.

  24. Canadian Couch Potato January 21, 2016 at 9:59 am #

    @Roy: Capital gains distributions will appear on your T-slips, so they must be reported in the year they are received. The issue is that if you do not adjust your cost base upward, you could pay the capital gains tax a second time when you eventually sell the shares.

  25. Roy January 22, 2016 at 10:45 pm #

    @Canadian Couch Potato: I agree, it’s just that I did not see mention of this (paying cap gain tax) in the white paper or numerous comments (apologies if I missed it), and so did not know if people just weren’t paying it or if it was so obvious it was not even worth mentioning. Thanks for the reply and the article.

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