Many readers have used our white paper, As Easy as ACB, to learn how to calculate the adjusted cost base of their Canadian ETF holdings. I’ve received several comments and questions from readers who wonder whether the process is the same for US-listed ETFs—and the answer is no.
You already know that dividends and interest from US securities are taxed at your full marginal rate. What you may not realize is that return of capital (ROC) and capital gains are also fully taxable. And although ROC and reinvested capital gains affect your ACB with Canadian securities, they are unlikely to be a factor with US-listed ETFs.
First some background: in a 2012 court case, a Calgary investor named Hellmut Schmidt argued that ROC and capital gains distributions from a US-listed security should get the same tax treatment as they do when they come from Canadian funds. He argued the ROC should not be taxable, and that he should be on the hook for only half the capital gain. But the judge disagreed and ruled that all the US fund’s distributions were fully taxable as foreign income.