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 non-registered accounts, things are more complicated, even if you’re a Couch Potato who uses ETFs and index funds.

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calculator_322Being 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 non-registered 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.

6 comments on “Calculating your adjusted cost base with ETFs

  1. Hi Dan, loved your white paper. I have been calculating my ACB myself using the RCA 4169 as reference. I re-did my ACBs using your paper as a guideline. In step 6 (reinvested capital gains distributions) – shouldn't the total number match box 21 from the T-3? Is it necessary to input from CDS charts if I know what my totals are for an individual ETF? Same for the step 7 (input Return of Capital), I have a detailed breakdown from TD Waterhouse, so to simplify could I just put in the total ROC instead of inputing the monthly calculations? Thanks for your help!

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  2. Like Keen, I appreciated the article and have been an AdjustedCostBase.ca user for a long time. Really liked all the case-by-case details on how to use it, and the link to CDS charts for the fund/ETF month by month distribution breakdown.

    We too have ROC and reinvested capital gains distributions reported from our six-figure CDZ account. Like Keen's case, doing twelve individual monthly ROC entries makes no sense when the total ROC amounts to $0.78!

    For the 2012 reinvested total of more than $4K, because the units held have changed with the DRIP, then I'd guess that the monthly calculations would be important.

    But RBC Direct Investing just posted a total dollar amount for 2012, so if they have considered holdings on a monthly basis, maybe the total amount will agree – have to do that to find out for sure, but more importantly, if you have sold any units during the past year, then the correct ACB would have to include individual postings to the ACB, right?

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  3. And what good does it do to see these in late April, reflecting 2012 distributions when you need to file taxes in the same month (or already have filed before the brokerage account updates to ACB)?

    What a mess, unless there has been no sales last year needing ACB values. In my case, I have no liquidated units, so doing it monthly via CDS ROC isn't important, but like Keen, we'd like to know how to handle it.

    And in another registered account with CDZ, I still maintain my own ACB data, whether or not there is tax liability, and at Questrade I never saw any ACB adjustments in the past. Now at RBC DI, I'd like to tell them the corrected ACB for this holding, so I'll go through the CDS charts to do so.

    Like TD, you have to ask for a manual change in registered accounts, even though TD let's you do it yourself on non-registered ones — at your own peril, i guess.

    Nevertheless, a hugely beneficial white paper from Justin and Dan.

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  4. Hi Dan,
    Do you have any expertise on the US listed Vanguard ETFs (like VTI)? MY T5 only has the Foreign Income and Foreign tax paid boxes filled in. On this distributions paid, there isn’t much information except for the Realized capital gain/loss section – does this apply to Canadian tax filers, and if so, what do I do with it?
    Thanks,
    John

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    • Also, has there ever been return of capital for these funds (VTI/VWO/VEA etc)?

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      • @trout: Take a look at http://canadiancouchpotato.com/2014/04/10/adjusted-cost-base-with-us-listed-etfs/

        Also, can anyone think of investments where ACB tracking is extremely simple (i.e. only purchases and sales)?
        My current solution for my non-registered account is to use Horizon swap ETFs, XHT and HXS.
        I also like GICs for the ease of calculating taxable income.
        I’ve also considered buying Berkshire Hathaway stock as AFAIK it never has distributions.

        Does anyone known if TD e-funds have ROC or other “phantom distributions” that would make calculating ACB burdensome?

        Reply

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