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 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, capital gains 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.
In March, 2013, Credential Direct sent a letter (along with T3 slips) to clients which included the following message: “Starting for 2012 tax year any amounts allocated to Box 42 on your T3s will be adjusted for you. This will be done by cost only journals processed backdated to each 2012 record date that you held the security in this account. Trusting that your prior years’ ACB has been regularly adjusted, going forward you will no longer have to adjust the ACB manually.”
I don’t see how this new system could work for funds that were acquired several years ago and for which the ACBs have been adjusted several times over the years. It seems to me that this would only work for products purchased in future, given that Credential Direct has not been tracking ACBs prior to 2012. In those cases, I assume that the client would have to continue adjusting the ACBs manually. Unfortunately, their letter didn’t clarify that.
Comments? Am I missing something?
Thanks very much for your white paper. I completed everything last night and it was very simple and straightforward.
I have a fair chunk of my non-registered money in a ETF paying only capital distributions and it’s great not paying any tax on these. However, I’m concerned that in several years time when my ACB is down to zero and I have to declare all those years distributions in one year, that I will be faced with a big tax bill. Would it make more sense to sell some shares every year or so and pay some tax to keep the ACB from getting to zero? Any advice would be welcome. Thanks.
@Confused, Otis, Barbara, etc.: I don’t mean to ignore your questions, but I hope you will understand it would be irresponsible for me to offer tax advice to individuals. I’d invite experienced readers to chime in, but everyone should keep in mind that there is no substitute for professional advice when it comes to taxes. Just because someone on a blog or web forum gives you a confident answer doesn’t mean they’re correct.
I have now entered my own portfolio on adjustedcostbase.ca and found it easy to use. I am confused about one issue though. For my US dollar ETF’s if I am using the noon exchange rate from the BOC, then am I not missing the currency exchange fees that my bank charged me? How is this taken into account?
Dave
@David: I stumbled across that as well and decided to rather use the actual currency exchange rate if there is one, e.g. from the broker exchange rate as per my monthly statement.If you use Norbert’s gambit to switch currencies, then the BOC rate may be the best bet.
As for using adjustedcostbase.ca, I decided against it for two reasons:
1) With all due respect for the good intentions of the website owner, all data entered there is still ephemeral and may at some point in the future disappear. If I keep track of my ACBs in an Excel sheet, the information remains under my control. After all, I will need my ACBs decades from now.
2) In case of a CRA audit, instead of “I entered the data on that website and gave you guys the numbers that came back,” I rather want to be able to say “Here is my full ACB calculation history. Feel free to re-trace every transaction, if you want.”
@Holger:
Would you mind sharing your exel template for tracking ACB (including exchange rate)?
Thanks
@Jas: Gladly. Clicking on my name in this comment links you to the file. Mind that this is more functional than pretty.
@CCP: Dan, please feel free to remove this post if you don’t want me to add this here.
I don’t see a big problem with using the wesbsite because if you download your spreadsheet each time then you will always have a record of all your transactions and the calculated ACB.
@Holder: Thanks a lot!
“I don’t see a big problem with using the wesbsite because if you download your spreadsheet each time then you will always have a record of all your transactions and the calculated ACB”
One thing that is missing from the exported spreadsheet from adjustedcostbase.ca is the US $ exchange rate. You can enter the exchange rate when you enter the transaction, but the exported spreadsheet will only show the value in canadian $ (after the conversion). For this reason, I’m not sure their spreadsheet would be enough in case of a CRA audit.
Hi,
I can’t open any excel file on CDS Innovations for ETFs. I changed the security level to medium and enabled macro as instructed but it gives me this msg: Compile error in hidden module:This workbook. Could it be because my EXCEL is very old version?
Is there another website I can look up this information? Or should I contact ETF company to get the info to calculate ACB? I need total non-cash distribution per unit and return of Capital according to the white paper.
@CCP: I’m actually having the same problem than Diane, I can’t open CDS innovations exel files. I’m using a Mac OS computer with Exel 2011.
Can’t we use the information provided by the discount broker instead? Don’t we received an annual report with all the information needed?
@Diane: Per my post of April 11 here a CCP, I had the same problems. I am running Excel 2000 under Windows XP (and Windows 7).
I did determine that the CDS Innovation Excel files that were giving me problems did work fine in Excel 2007 under Windows XP.
For my part, I’m upgrading to Office 2010 (the licensing issues on Office 2013 are ugly and I’ve been advised to avoid it). Office 2010 is hard to buy locally but is still available online (Ebay and Amazon)
@Jas: I have no idea why Excel 2011 for Mac would have a problem, considering Windows XP / Excel 2007 works fine.
@Diane: If you can’t access the CDS site, the basic tax breakdowns should all be available on each ETF’s web page. Just click the “Distributions” tab. For example:
http://ca.ishares.com/product_info/fund/distributions/XRE.htm
I’m surprised there are troubles with a new Mac version of Excel. But as an overall comment, I think every do-it-yourself investor should be using an up-to-date version of Excel: it’s an essential tool. I’m not sure how anyone gets by with versions that are six or seven years old unless all you’re doing is adding columns. We make it a requirement of clients of our DIY Investor Service. :)
@Dan: In this link, I don’t see Return of Capital and “Reinvested” column is non-cash distribution per unit?
http://ca.ishares.com/product_info/fund/distributions/XRE.htm.
I need to do calculation for ZWB. The brokerage sent me T3 Summary of Trust income and expense and it had Total distribution, return of capital, nonelig. actual div, eligible actual div, capital gain div, etc. I don’t t know which one is total non-cash distribution you mentioned in the ACB paper. Thanks so much.
@Diane: For ZWB, the distributions info is available here:
http://www.etfs.bmo.com/bmo-etfs/distribution?fundId=83031
Hi Thanks. When I entered info on ZWB (BMO Covered Call Canadian bank ETF) on adjustedcostcase.ca. It says it might not qualify for capital loss because it seems to involve short selling. Does it sound right?
@Diane: I’d suggest you consult a tax specialist about questions like this.
Do you have to calculate your ACB for your investments in your RRSP? I understand you don’t have to for your TFSA because contributions into a TFSA are not tax deductible (you already paid taxes on them) unlike an RRSP.
@Onur: No, you don’t have to calculate your ACB in an RRSP because there are no capital gains taxes payable. All the growth in your RRSP will be taxed as income when you eventually withdraw it.
@Canadian Couch Potato: Right, I forgot about that. Thanks for the prompt response!
@CCP:
Is this document equivalent to the CDS innovation files but for TD e series mutual funds?
https://www.tdassetmanagement.com/Fund-Document/pdf/Distributions/TD-Mutual-Funds/2012_TDMF_TDCT_e_ENG.pdf
Distributions are made only once a year in december with TD e series mutual funds, so it makes the ACB tracking a bit easier..
@Jas: Yes, I believe this should be adequate for ACB reporting.
Hi:
I started a non-registered account as i have no RRSP room (due to DB pension) and have do not have TSFA room this year. I am trying to be a DIY investor, and have taken a modified potato approach and have invested in index ETFs in my RRSP and TFSA.
However in my non-registered account I have decided upon a mix of Canadian/US stocks and some REITS and Trust Units (Calloway, LVN.UN, SCHB and VEF). I have signed up to adjusted cost base and am recording and tracking activity, but I am a tad confused on what I need to capture from the distributions from the REITS and Trusts.
I see on the distribution breakdowns from previous years portions/percentages of the distributions are captured as ROC, capital gains, other income (and a few others, which have slipped my mind). So with respect to Calloway for example, am I just to capture ROC or am i also to enter an entry for capital gains for the remaining portion of the distribution? I also see that at times the statements shows non-cash distributions…am I take it I am to record these via adjusted cost base as reinvested dividends or reinvested capital gains?
Any help would be appreciated…I am starting to rethink that using a non-registered account to accumulate savings for retirement is beyond my level of expertise…I am starting to second guess even simple transitions and am not sure if I am capturing simple stock distributions as capital gains correctly.
Again any help would be appreciated.
@DF: The accompanying white paper goes into detail about the different types of distributions. We used a REIT ETF in the example, so the same principles should apply to individual REITs.
Re: Holger Excel table for tracking ACB on foreign ETFs
Nobody seems to have noticed the problem with this table, which seems to take for granted the US designation of the different components of U.S. ETF distributions. According to Canadian rules, all distributions made by a foreign ETF are considered foreign income and taxed like any other income (see the case Schmidt v. The Queen, http://decision.tcc-cci.gc.ca/site/tcc-cci/decisions/en/item/30789/index.do). As tax is normally paid on the return of capital like on any other component of distributions made by a foreign ETF, I would think that the return of capital should not be deducted in the calculation of ACB (unless one wants to pay tax a second time when selling the securities), but should rather be added to the previous ACB as the other components of distributions. Is anyone able to confirm this treatment of the return of capital in the calculation of the ACB?
@Antoni: Any links provided by commenters on this blog are the responsibility of the creators. My understanding is the same as yours: all distributions from US-listed ETFs are considered foreign income by the Canada Revenue Agency. The different treatment of dividends, capital gains distributions and return of capital that apply to Canadian securities do not necessarily apply to US securities when calculating ACB.
Jamie Golombek wrote about the Schmidt case in the Financial Post. Note this excerpt:
@Antoni: First, you are absolutely right that ROC is not an issue for foreign ETFs, because all distributions are fully taxable as foreign income. That said, this is not a tool/worksheet “problem” but rather a questions of correct usage.
Like the Internet site mentioned in Dan’s ACB paper, the Excel worksheet in my link is for tracking both Canadian and foreign ETFs. For foreign ETFs you just use buy, sell and split transactions, but never ROC or non-cash distribution transactions.
It is still important to keep track of all your ACBs, Canadian and foreign alike, because you need to account for your capital gains/losses.
You deny the problem when you say “ROC is not an issue for foreign ETFs”, when your tool/worksheet, in the second line, reduces the ACB following a return of capital from 99,10$ to 99,00$ (presumably of a U.S. ETF, as the original amounts are in US dollars).
Nowhere is it said that “for foreign ETFs you use just buy, sell and split transactions, but never ROC”, and as pointed above, you do exactly the opposite in the second line of the tool/worksheet.
I grant that “it is still important to keep track of your ACBs, Canadian and foreign alike”, but one should keep track of them according to the rules applicable in Canada, which are different for Canadian ETFs and for foreign ETFs.
I would suggest to you to delete the mention of the return of capital (in the context of a distribution of return of capital in US dollars) and to add a note specifying that, as for return of capital, the rules are different for Canadian ETFs (where it is substracted from the ACB) and for foreign ETFs (where is is added to the ACB, as any other distribution).
@Antoni: I updated the worksheet according to your suggestions. Thank you. I just hope that users of adjustedcostbase.ca would get the same warning. The rules are complicated and, as our discussion proves, not trivial to understand.
With this in mind, I believe that your remark “ROC … for foreign ETFs (where is is added to the ACB, as any other distribution)” only holds true for re-invested distributions.
I am not aware that foreign cash distributions that are not re-invested actually increase the ACB. They are just taxed like any other foreign income.
If you believe that non-reinvested foreign cash distributions DO increase the ACB of the underlying asset, do you have a source for this? In the absence of confirmation I deem this approach risky because it would cause you to understate your capital gains when you sell your assets.
You’re right : no reinvestment, no adjustment of the ACB.
I just took the reinvestment for granted, which it isn’t. That was implied in the remark “where it is added to ACB, as any other distribution”.
Love your ACB Calculator. I am a DIY/buy & hold investor. Could not count on TD Waterhouse to corectly track the ACB….frequent errors…..in particular with an Advantaged Oil & Gas Trust whose distributions were all ROC. Considerable time spent in past 9 years to verify Book Value. Sold it recently for year end tax planning purposes, but also as part of process to simplify record keeping of my portfolio.
I have just finished using your Adjusted Cost Base. ca calculator for this security. Works very well. To reduce # of entries, added up all monthly distributions for a year and entered them as one transaction on Dec 31. Also, 4 years ago I changed DRIPs to cash distributions for all my holdings which were eventually reinvested in other dividend stocks or ETF’s. (Your recommendation in your April, 2013 post: Why You Should Avoid DRIPs in Taxable Accounts. I am now ready to face the CRA with a solid ACB for this Trust…. thank you!
@JohnV: Thanks for the feedback, and glad you found this helpful!
Thanks for this very useful and informative post. I am using the spreadsheet so generously made available by Holger, mainly to maintain control of my financial records, many thanks. I have also taken your advice in another post and stopped using DRIPs in my non-registered account, which should cut down a great deal on future calculations.
@CCP:
In the white paper, about the 6th step ( “input reinvested capital gain distributions”),
do you know if this only apply to ETFs and not mutual funds, or is it also possible to have reinvested capital gain distributions with mutual funds?
Here is a summary of all distributions for TD e series funds in 2012. I don’t see any reinvested capital gain distribution (or total non cash distrution per unit):
https://www.tdassetmanagement.com/Fund-Document/pdf/Distributions/TD-Mutual-Funds/2012_TDMF_TDCT_e_ENG.pdf
Thanks
@Jas: Yes, mutual funds can have reinvested capital gains, which would be distributed at the end of the year. Index funds aren’t likely to distribute capital gains unless there is a significant change in the index resulting in a lot of forced sales, so it’s not too surprising to see this with TD.
This is the best document I have found explaining taxation of mutual funds:
https://www.phn.com/portals/0/pdfs/FormsandDocuments/030-2013-rbc-1834-S-tax-invet-mutal-fund-final.pdf
@CCP:
Thanks for your explanations!
If you invest with ETFs for 10-20 years and then start selling at retirements,
I guess the exel file of all the transactions becomes quite extensive.
What do you need to bring to your accountant each year for tax reports? Do you need to print the complete exel report of all 20 years?
Or you could just use the adjustedcostbase.ca filter “by year” and just print the transactions for the current year?
I guess you only need the full report if CRA ask some questions?
@CCP:
Do you know if most ETFs make distributions every months?
If I had the choice between an ETF with distributions q4months vs every month, I would probably choose the one with less distributions since it involves less paperwork..
@Jas: Your first few questions are better directed to your accountant.
As for monthly vs. quarterly dividends, it varies a lot, but the distribution schedule is always available on the fund’s web page. I tend to agree with you: the fewer distributions, the better. My sense is that ETF providers pandered to investor demands for yield a few years ago:
https://canadiancouchpotato.com/2010/06/28/more-etfs-now-paying-monthly/
If you’re using DRIPs in registered accounts, the frequent distributions are also a pain:
https://canadiancouchpotato.com/2012/12/31/ask-the-spud-do-i-have-enough-for-a-drip/
Hi,
In my margin account I bought XBB ETF http://ca.ishares.com/product_info/fund/distributions/XBB.htm in 2012 and sold in 2013. After reading up on ACB and using http://www.adjustedcostbase.ca I am confused if the monthly distributions which are in cash not reinvested from XBB should classed as Capital Gains Dividend or Return Of Capital for the ACB calculation as I need to calculate the ACB for my 2013 return.
I am a novice investor, so appreciate any insight from anyone here whether XBB should be classed as Capital Gains Dividend or Return Of Capital.
@Joe: The link you provided answers your own question: Scroll to the bottom and you will see how the distributions are characterized. Almost all of it is interest income, which is fully taxable in the year received and does not affect your ACB. However it looks like there was a reinvested capital gain in 2013 that would affect your ACB: see the white paper for details.
I’ve entered all my transactions into adjustedcostbase.ca. Just to clarify though, what kind of transaction would interest be?
For each DRIP there are two transactions: the interest (positive) and the reinvestment (negative). I know the reinvestment goes in as Reinvested Dividend, but does the interest classify as Capital Gains Dividend?
The website and white paper have helped a lot in this regard. I wasn’t aware that I should avoid DRIPs in a non-registered account but I think I’ll be fine with a bit of extra paperwork/tracking to ensure a quick reinvestment of my funds.
@NewbiePotato: I’m concerned you may have misunderstood how to calculate ACBs. Interest and dividends paid in cash (or paid in the form of new shares as part of a DRIP) do not figure into the ACB calculation at all. However, if you have a DRIP then each new share would be considered a new purchase. This is not the same as reinvested distribution that occurs at the fund level. With a DRIP you are increasing the number of shares you own: with a reinvested distribution you are not.
I would encourage you to get the help of an accountant or other tax preparer to enure you don’t make errors on your return.
I have a synthetic drip set up with BMO Investorline. Each month I get 2 transactions per fund, one labeled “interest” (but I believe is the dividend?) and one purchasing as many new shares as I can with the dividend.
So from what I understand the “interest” amount doesn’t need to be recorded in the adjustedcostbase.ca but the “reinvestment” would add to my cost base, as I am purchasing more shares.
I was getting confused with the interest/dividend since I didn’t see an option in the site to enter it, but from what you are saying that number doesn’t need to be inputted.
Correct?
@Newbie: If it’s an equity ETF then, yes, what your statement is calling “interest” is likely a dividend. But it any case, the important point is that new shares received as the result of a DRIP are recorded as new purchases. They are not entered as a reinvested distribution. So it’s not accurate to say they are added to your cost base: they might be, but it depends on the price they were purchased at. (This is why we recommend not using DRIPs in taxable accounts!)
Hi,
Does this spreadsheet only work with excel? I am using Calc from OpenOffice and some of the calculations do not appear to be working.
@Larry: The spreadsheets do seem to require a recent version of Excel. I tend to think a recent version of Excel is essential for DIY investors.
Does return of capital on a non-cash distribution affect the ACB? Or only on cash distributions?
Namely, I’m looking at the ZCN sheet from CDSinnovations.ca, and distribution 5 is all non-cash, but also has an entry in the Return of Capital row, and I’m wondering whether to add it or not. It seems odd to add the full non-cash distribution amount as a “Reinvested Capital Gains Distribution” but then also subtract the Return of Capital included in that.
(You may want to update the relevant section of “As Easy as ACB” with the answer to this.)
@Ken Pratt: All non-cash distributions are treated the same way, regardless of character (capital gains, dividends, ROC). They all increase your ACB. But then you need to decrease your ACB by the amount of the return of capital, so the two adjustments cancel each other out. It’s very odd, I agree. The reason we didn’t mention reinvested ROC in the white paper is that it is extremely rare: ZCN this year is the only example I have seen. After all, the whole point of return of capital is to provide income, so reinvesting it is hard to understand, and I’m not sure why ZCN did this.
I have been purchasing non-registered mutual funds thru an advisor for over a decade and never once have I figured out my ACB.
Is it too late?
I would like to switch from mutual funds to ‘couch potato’ investing. Do I have a big mess to straighten out?