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.
Wow…I never realized that the discount brokerages don’t give you the ACB information when you sell. When I sold all my non-registered investments at Investors Group I got a statement that had all the information.
@Sterling: Maybe you do get some value for those 2.9% MERs. :)
@CCP
LOL…yeah I suppose you do!
Just to be sure, would I have to do an ACB calculation for any index mutual funds in my non-reg as well or is this just for ETF’s?
I just filled my taxes yesterday and I believe that StudioTax claimed the foreign tax credit (line 405) for me. I just had to enter the country.
@Sterling: You need to calculate your ACB for any asset you sell. With mutual funds, however, you can’t use services like CDS Innovations or AdjustedCostBase.ca, because these only cover individual stocks and ETFs.
I’ve just added all my trades for the last 2 years into there…. The only problem I had was I didn’t know how to enter the details for shares I received when a Company spun out some of its assets. I know what the shares were valued at when spun out, and I know I paid a price for the shares of the original company before it spun out the asset. But I didn’t pay anything to get those shares into my portfolio…
Why not just put all the etf’s/investments in TFSA and we can forget all this stuff no?
I’m just really surprised that this is something we need to do. I’m planning to move some money from my NON-REG into my TFSA and I never expected this. I will be mostly buying and holding until retirement (or until an emergency) and I can see how calculating by ACB 30 years down the road will be an issue.
Well. that works as long as you have plenty of room. As a ‘New Canadian’ – I have maxed out all my tax-free room as I am only allowed a few years of contributions, so have to deal with trying to put everything where its taxable in one form or another…
@Dan, I surprised, I thought there would be an easy to use spreadsheet for calculating this. Haven’t you seen anything useful? Que
@Que: You can try the ones here:
http://www.canadiancapitalist.com/free-acb-capital-gains-tracker-in-excel/
Keep in mind that AdjustedCostBase.ca is probably an easier way to do the inputs, and you can export its report as an Excel file when you’re done.
Its simple to calculate with spreadsheet. Trick is going back multiple years through statements and dealing with exchange rates.
Dan, another super post.
A quick point: When calculating the CA$ value of US$ costs I believe CRA allows you to use your actual cost (or a reasonable estimate?) of the conversion.
Since, per their website, the “Bank of Canada exchange rates are nominal quotations — not buying or selling rates” they do not reflect the bid / ask spread.
Further, I believe the rates are for large $ values between large financial institutions. Most DYI investors cannot or do not obtain such favorable rates (unless, perhaps, by using Norbert’s Gambit).
Bottom line, convert to CA$ at your actual cost (it can make a significant difference).
I got 33 CP stock shares that my father buy to me when I was young. I never bought other share but I am guessing there been a multitude of split and I got 90 stock shares of Encana and 90 stock shares of Cenovus because I had CP stock when CP founded these business.
1.If I sold my CP stock does my ACB is what my father paid for them 20 years ago?
2. If I sold my Cenovus stock or my Encana stock, do my ACB is 0$ or it a % of the CP share price 20 years ago?
3.If I sell do I pay capital gain on it or my father pay the capital gain on his taxes?
@DaveL: To clarify, the USD conversion step applies if you buy an ETF with US dollars, i.e. with no conversion of the currency. If you buy a US-denominated fund with Canadian dollars and your brokerage converts the currency for you, then yes, you can use your actual cost in CAD.
@Francis: It’s not appropriate for me or anyone else to advise you on such specific questions. When it’s time to sell your shares, you should consult an accountant or tax adviser.
Calculating ACBs for ETFs in non-registered accounts is an unfortunate complicated hassle if you are with a discount brokerage unless you are fortunate to become a so called ‘five star client’ when they will send you those! I use AdjustedCostBase.ca and find it most useful not only to keep track of cumulative buy/sells which happen with rebalancing but as well to keep track of all the various distributions that come with the etf world and affect the ACBs. AdjustedCostBase.ca will handle return of capital, capital gain dividends whether paid or reinvested and all other distributions which affect the ACBs.
@CCP: Very useful post thanks!
I went to a seminar from the National Bank of Canada about their discount brokerage service (nbdb.ca). According to the NBC presenter , many investment advisors use a software called Croesus for ACB tracking. ( http://www.croesus.com).
He also said that NBC is the only bank discount broker in Canada to offer to their clients an annual gain&loss report for 40$ using the same “Croesus” software . This report keep tracks of the ACB, however they say is not “officially” approved for tax reporting since it is computer generated. It’s still better than nothing…
A friend of mine is using NBC’s discount broker and he confirmed that they do send annual report and that it seems to be quite reliable..
“You need to calculate your ACB for any asset you sell. With mutual funds, however, you can’t use services like CDS Innovations or AdjustedCostBase.ca, because these only cover individual stocks and ETFs.”
I may be wrong on this, but from what I’ve seen from AdjustedCostBase.ca I think you could use it to track the ACB for a mutual fund as long as you don’t choose to re-invest the distributions automatically. You would enter the transaction just like for an ETF but the transaction fee would be 0$.
About ACB tracking in taxable accounts and mutual funds:
http://www.financialwebring.org/forum/viewtopic.php?f=32&t=115867
@Jas: I suppose you could use AdjustedCostBase.ca with mutual funds, but CDS Innovations does not list the tax breakdown for mutual fund distributions, so you would need to get that information directly from the fund company.
I’ve never had losses or gains before, but I just submitted a loss, will the CRA keep this loss recorded somewhere for me, so I can offset future gains? Any help in describing how this process works would be great. Thanks!
Dan,
Excellent post and recommended service. You are a gem, you know that?
Cheers….GeoEng51
Yet another great article. Just got finished going through the paper as well, and it’s good too. I guess I’m surprised that there would be a significant number of DIY investors who don’t use tools like Quicken for individual investment accounting. I’ve found over a lot of years now that Quicken easily allows me to do all the investment accounting pretty quickly. I input any transactions monthly, which are almost all simply recording of dividend reinvestments, dividend payments, interest, return of capital etc. Quicken’s reporting makes tax time quite straightforward. The only challenges I’ve had are translating some of TD Waterhouse’s cryptic statement entries into equivalent Quicken transactions.
With respect to using CDS Innovations, I’d agree that it’s a great resource. However, for anyone with a preponderance of holdings in one company’s ETFS, e.g. iShares, those companies produce regular reports showing splits of payments by type (dividend, interest, gains, return of capital). iShares’ report is a lot easier to use than CDS Innovations.
Bottom line? There’s more than one way to do this, yet your guidance, as always, is most helpful!
Dan,
1. Is there a similar website like CDS Innovations for US ETFs like Vangaurd (VTI, VXUS, etc)?
2. Is there double counting when accounting for return of capital, once when you file a T3 slip on income, and then a second time when you report a lower ACB, thereby increasing your capital gains?
I’ve received a few e-mails from readers who say their brokerages regularly update ACBs, so they don’t need to do this themselves. Unfortunately, the book values provided by brokerages are unreliable: it is not their responsibility to calculate these accurately, it’s yours. If you are calculating capital gains and losses based only on book values provided by your brokerage, you could be paying too much or too little tax.
I have what I consider to be a healthy aversion to entering any of my financial data into websites even if it is relatively anonymous. So, I built my own ACB spreadsheet based on the layout of adjustedcostbase.ca. I then entered a load of dummy data into both the website and my spreadsheet to QA the latter against the former. This way I also have a complete record of not only the entries but also the calculations. Building the spreadsheet also helped me gain a better understanding of ACB calculations.
On another note, many thanks for the ACB White Paper – VERY useful. I wasn’t aware of the CDS Innovations website and their tax breakdowns in spreadsheet format. To date I have been downloading PDF tax breakdown files from Credential Direct and QTrade and manually transferring the breakdowns to a spreadsheet to calculate the dollar value breakdowns of my received distributions. The CDS information will save me a laborious step. Thank You !!
Hi Dan, another piece of excellent advice. I like your well-written and clear paper, that points out where to find and how to use the relevant information.
I just wonder, though, why you would really need a tool like AdjustedCostBase.ca to track this? I would think that the calculations triggered by the different transactions are simple enough to allow keeping track of them in an Excel worksheet, especially with the walk-through provided in your paper.
Having said that, the information on how to easily obtain ETF tax breakdown information is priceless! I was not aware of the CDS Innovations repository and it is not easy to find if you don’t know about it.
As for tracking the value and cost base of foreign currency denominated ETF’s as a Canadian, that, maybe, could be a subject of sufficient complexity to warrant separate coverage, couldn’t it?
Dan, the white paper is a good resource. I was looking for something like CDS when I was trying to look up older Claymore funds. The CSRs at iShares were not much help.
@Que: The CRA will not automatically apply your capital losses against your gains: that’s your responsibility.
@Simon: For Canadians, there are no tax breakdowns for different types of income from US-listed ETFs i.e. dividends and interest are both fully taxable and will appear on your T5. Return of capital would be an exception, but I’m not aware of US-listed ETFs that make this sort of distribution.
I asked Justin about your second question and he replied: “Return of capital does appear on a T3, but it is not an entry that must be made on your return. Your brokerage is simply indicating to you that adjustments are necessary.” So there should be no double-counting.
@Holger: Glad you found the paper helpful. I’m not sure what additional info you are looking for regarding the tracking of foreign-denominated ETFs. All you need to do is adjust the currency as explained in the white paper.
Dan, thanks for this helpful post, especially your ACB white paper. I have been following an alternative approach that avoids much of the data entry required by Adjusted_Cost_Base.ca. I have created a spread sheet for each ETF. Each year I download the transaction history from my nonregistered Investorline account, sort by ETF symbol, cut and paste for each ETF, then sort by date. My spreadsheets have several additional columns with formulae to automatically update the ACB after each transaction. After receiving the T3 and T5 slips, I make additions and modifications (if necessary) to include information missing from the transaction history (non-cash distributions and division of cash distributions among ROC, Capital Gains, etc). This approach requires some work up front but may reduce effort and data entry errors down the road. Or so I hope.
Thanks for this Dan (and Justin).
A comment and question:
I use personal financial management software (MS Money, but it functions similarly to Quicken), which will import OFX/QFX files from online brokerages such as Scotia iTrade, BMO-IL, and TD Waterhouse.
What I’ve noticed is that the “book value” calculated by the software differs from what shows online with the brokerage.
In reviewing all the transaction data, everything’s correct – purchase prices, dates, amounts (to the 6th decimal place) – but the software calculates a different ACB.
Any thoughts on “which one is correct?” and how I’d go about proving that or tracking down errors? I suspect a lot of folks use Quicken or MS Money and would benefit from knowing they’re accurate (or not) for tracking their investments. FYI, MS Money is free for download if you want to experiment with this. Could be a huge time saver over Excel.
@CJ: I’m not familiar with Quicken or MS Money in this respect, so I don’t think I can offer anything useful. But the point we tried to make in the white paper is that you cannot trust the book values supplied by the brokerages in the first place. Reinvested non-cash distributions and return of capital, in particular, are not likely to be included in their calculations.
@Dan, in Response to “The CRA will not automatically apply your capital losses against your gains: that’s your responsibility.” How exactly do you do that? If you harvest losses in 2012 and report them on your taxes in 2013 (to be saved for future gains), when can you use these losses to offset gains? OR Do you just subtract them later during the gain years, or right away, or both? Just wondering what you exactly do once you have calculated the ACB. Thanks!
@CCP excellent post and very timely.
I spoke to my accountant recently and he said I needed to report the sale of DLR when I did Norbit’s gambit. I was a bit surprised at this at first, since no tax slip was given. Like you said though it’s our responsibility to report any capital gains/losses at the sale of a ETF.
This “couch potato” investing can actually require some time and energy … TD e-funds are looking more attractive. :–)
I take it then that “book value” as reported by the discount brokerages is not the same thing as ACB?
Also, if you transfer mutual funds or ETFs from a non-registered account in to a registered one, does this lead to a capital gain/loss and a change in ACB values?
When I went through my past transactions I found other transaction types: Deemed acquisition and disposition
These happen when you become a resident or when you move assets between registered and taxable accounts. New residents only slowly grow their tax-free contribution limits and thus regularly deal with this.
Luckily, it’s pretty easy to substitute them with buys and sells.
@CCP:
I think it is important to mention that automatic dividend re-investment, either with DRIPs if you are using ETF, or with mutual funds, makes tracking the ACB much more complicated.
If you don’t re-invest automatically the dividends, you have much less transactions to keep track. You can then “manually” re-invest the dividends received once a year, in one transaction.
“I suppose you could use AdjustedCostBase.ca with mutual funds, but CDS Innovations does not list the tax breakdown for mutual fund distributions, so you would need to get that information directly from the fund company”
All the information that you need to keep track of the ACB with index funds like TD eseries is available on the annual T3 report that you receive from TD asset management inc.
This is another benefit of TD eseries index funds versus ETFs..
@Be’en: Book value and ACB are often used interchangeably, in theory. In practice, the book value supplied by your brokerage or on mutual fund statements has not always been “adjusted” to account for all transactions.
To answer your second question, if you transfer a security from a non-registered account to an RRSP, there is a “deemed disposition,” which means for tax purposes it is treated as sold. If there is a capital gain, you pay tax on it. But if there is a capital loss, you cannot claim it:
http://www.taxtips.ca/personaltax/investing/transfersharestorrsp.htm
@Jas: You’re definitely correct that using DRIPs in a non-registered account can lead to a lot of additional paperwork. DRIPs can very convenient in an RRSP or TFSA, but they are probably more trouble than they’re worth in a taxable account.
@CCP: Dan, with my reference to foreign-currency denominated securities I meant that exchange rate spreads may significantly reduce your actual capital gain, compared to a calculation purely based on the BOC rate.
Let’s assume that you buy USD 100,000, invest this amount and sell with a 10% profit. For the same of simplicity, let’s also assume continuous CAD/USD parity.
Using the BOC rate (parity), you report a capital gain of CAD 10,000. If your broker converts your money with a 1.5% markup/discount, your actual capital gain is CAD 6,850 [calculated as (110,000 * 0.985) – (100,000 * 1.015)]. In effect, you are paying taxes for $3,150 which you never received as capital gains.
I guess that you cannot use currency exchange spreads in calculating your capital gains, can you? If this were possible, you would have to track your applicable exchange rate almost in the same way as your ACB.
@CCP – “Book value and ACB are often used interchangeably, in theory. In practice, the book value supplied by your brokerage or on mutual fund statements has not always been “adjusted” to account for all transactions.”
Well this is concerning. I just filled my taxes using the number my old mutual fund company provided me. I never thought for a second that their “book value” would be inaccurate. I had logged the numbers from the day I sold (but it really should have been on T+3) and my numbers were quite different from theirs. Hmmmm….I guess I should be using that site or talking to an accountant.
Thanks for the heads up!
“Book value and ACB are often used interchangeably, in theory. In practice, the book value supplied by your brokerage or on mutual fund statements has not always been “adjusted” to account for all transactions.”
This is so true (unfortunately) :(.
I use Investorline and they give me an annual ACB printout on my etf Port. Really, I don’t know why they do an ACB calculation and keep records. Perhaps ‘by law’ they need to keep track. Now, as I said above, I do my own ACBs and reconcile all distributions to the cash account of Investorline since I don’t DRIP. Never, do my ACBs completely agree with Investorline. Dan is right you really can’t trust any discount brokerage, full brokerage, nor mutual fund companies’ calculations.
Now eventually as your non-registered investment account gets larger CRA will request an audit. Whose ACBs will they use? If you have reconciled all your distributions to the cash account of your unregistered investment account and kept detailed track of your ACB calculations unless there is a large discrepancy between the discount investment ACB and yours everything will be fine :). If there is a material discrepancy to prevent paying tax your detailed ACB calculations will stay the day!
@Holger: Your initial cost and the sale price will include whatever spread you paid on the currency.
For example, if you assume USD/CAD parity and a 1.5% exchange fee, then you will only be investing $98,500 CAD in the first place, so that is your initial cost. If that security goes up 10%, it will be worth $108,350. If you then sell it, you’ll lose another 1.5% on the transaction ($1,625.25) so you’ll receive $106,724.75. Your capital gain is therefore $106,724.25 – $98,500 = $8,224.25.
Over a longer period, where the USD/CAD exchange rate moves, you always calculate the buy and sell prices in Canadian dollars, using the exchange rate on the date of the transaction.
Thanks for the information provided. DRIPs aren’t the only problematic area with ACBs, the pre-authorized cash contributions (PACCs) program offered by some ETF providers are definitely on the way to purgatory, if not hell.
IShares, for example, has continued the PACCs that Claymore started. NO RECEIPT is provided, however. All I get on my on-line brokerage, Questrade (every discount has its cost…), statement is the number of shares purchased. I then have to go to the iShares site and see how much the posted PACC cost was, then go to my bank statement and check the refund for each of the funds, to make sure I know how much the purchase cost. Just recently, iShares has changed the refund method and it now all that appears is a bulk refund (!#&$#!).
They also have stopped listing the PACC & DRIP prices for many funds on a monthly basis, some of the funds only do it on a quarterly basis since that is the distribution frequency for that fund (!#&$#!). For example: http://ca.ishares.com/product_info/fund/distributions/CLU.C.htm – I just checked and none of my 5 funds have monthly PACC prices listed.
I know I can go to TMX.com & get the closing price & calculate an estimate, but it just seems like ridiculous lengths to go to figure out this out & I no longer have any way to check my calculation! I just bought 2 books on sale at a local bookstore for $11 & I received something called a receipt which shows how much each one cost, the total, and a transaction record.
CCP, when I call iShares, they don’t hang up on me, but I have never received any response to emails or follow up on my calls. Could you bring the whole sack of of über tubers to bear on this issue? At least you might get through to someone with seniority. Otherwise, I was going to write to the CRA minister, Ms. Gail Shea. Cheers for any advice & thanks for the well organized white paper and your continual efforts to educate us spuds.
@Personal PACC: Thanks for the comment. Although I’ve mentioned that the book values provided by brokerages are not always accurate, it does seem that it’s their responsibility to provide you with the price of any shares that are purchased through a PACC. Have you tried bringing this up with Questrade rather than iShares?
Although this won’t solve your problem for the 2012 tax year, it clearly makes sense to cancel your PACCs now that Questrade offers commission-free ETF purchases.
Interesting paper, especially the CDS Innovations info.
One small quibble:
“You must use the exchange rate on the date of settlement, not the trade date.”
You can also just choose to use the yearly average rate and avoid the hassle of looking up each transaction’s exchange rate.
Hi CCP,
I invest in the E Series (Bond, CDN, US & INT) and I was wondering if the distributions for each of these fund are treated as Return on Capital when tracking the ACB?
@Jeff: I don’t think any of the e-Series funds distribute ROC, but this information should be on your T-slips.
Oh… would I only need to keep track of my buying and selling activities of the E Series then? If the info of the distributions from the funds are coming from the T Slips.
I’m using Excel 2000. When following the instructions in the As-Easy-as-ACB pdf document, I downloaded the excel file for “ISHARES S&P 500 INDEX FUND (CAD-HEDGED)” from the CDS Innovatrions website.
When I open it I get Microsoft Visual Basic “Compile error in hidden module: ThisWorkbook” error.
I get the same error on all the ETF’s I tried, however many file such as “BIG BANK BIG OIL SPLIT CORP. – PREFERRED SHARES” open just fine.
I note that the CDS Innovations website says “requires Excel 97 or Excel 2003”.
Has anyone else had this problem?
This is a little off topic, but there are so many knowledgeable people here I thought I’d ask….how does one calculate ACB and capital gains/losses when one sells corporate class mutual funds. Moves take place between funds within the class without triggering tax consequences at the time, but ultimately ACB and gains/losses have to be calculated when the fund is redeemed. It is more complicated than the ACB calculation for a single fund. What are the rules?