As the tax filing deadline approaches, many investors are busy calculating the adjusted cost base for their ETF holdings. Last year at this time, Justin Bender and I collaborated on a paper called As Easy as ACB, which explains the rather complicated procedure.

An often overlooked part of ACB calculation involves adjusting for reinvested distributions (also called non-cash distributions). As the name implies, these are typically capital gains that were reinvested in the fund rather than paid to investors in cash. At the end of the year these will appear on your T3 slips and you’ll pay tax on them, even though you didn’t actually receive any income. But here’s the step that can get missed: if an ETF has a reinvested distribution, you should increase your cost base by an equal amount, which will reduce your future capital gains liability. If you don’t, you’ll pay the tax again when you eventually sell shares in the ETF.

The curious case of the missing distributions

If you held shares of the Vanguard FTSE Canada Index ETF (VCE) this year, your job is a little trickier. You probably looked on the fund’s web page to see whether VCE had any reinvested distributions in 2013. You can click the Prices & Distributions tab and scroll all the way to the bottom to find the View distribution history link. That will open a table of periodic distributions, which lists the ETF’s most recent payouts, including a column for reinvested distributions. That column is filled with zeroes for 2013:


But scroll down a little further and you’ll find a summary of the annual distributions that tells a different story. In the row for 2013 you’ll notice eligible dividends of $0.66774 per unit and a capital gain of $0.13229. Yet the grand total at the far right includes only the dividend amount. The capital gain is not included in that total, which means it must have been reinvested:


Vanguard had five other ETFs with reinvested capital gains in 2013, though VCE’s was the largest. However, the web pages for these funds all report the information in this misleading way. (I asked Vanguard for an explanation, but they don’t seem to feel there’s anything wrong.) The lesson: don’t trust the provider’s website if you’re tracking an ETF’s adjusted cost base. Instead, download the official tax breakdown information from CDS Innovations.

Go to the source

When you visit CDS Innovations (see our white paper for full instructions on navigating this site), you can download the spreadsheet for the Vanguard FTSE Canada Index ETF dated February 28, 2014. You’ll notice that Distribution 5 is a non-cash distribution of $0.13229 per share, and that this is indeed a reinvested capital gain.


This amount will show up on your T3 slip for 2013, so you’ll pay tax on it this year. And you should also adjust your cost base: if you own 1,000 shares of VCE, you should add $132.29 (that’s $0.13229 x 1,000) to your ACB for the holding. That will lower your future capital gains liability.

Three sheets to the wind

There’s one final wrinkle in the VCE story this year. If you search CDS Innovations for “Vanguard FTSE Canada” you’ll find there are actually two spreadsheets. In addition to the one mentioned above, there’s a revised version marked with an “R” beside the date. There is also a spreadsheet for the “Vanguard MSCI Canada Index ETF,” which is the old name for VCE.

This is because VCE changed its benchmark index and its name on April 2, 2013. (The index change was actually the reason the ETF had a large capital gain last year: the new index has fewer stocks, so the fund had to sell a number of its holdings.) As a result, Vanguard should have released two tax breakdown reports for the fund: one with the old name to cover the first-quarter dividend, and a second with the new name to cover the four remaining distributions. It looks like they issued only one in late February, then eventually corrected the error by releasing the other two on March 12.

Whether you use only the February 28 version or both the March 12 versions doesn’t matter: the information is the same. But if you happened to download only the newer version with the FTSE name you’ll be scratching your head about the missing first-quarter distribution.

This experience makes it clear there can always be surprises when you’re tracking your ACB. I’ll share a few more in my next couple of posts.