Author Topic: ACB - am I doing this right?  (Read 4646 times)

PharmaStache

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ACB - am I doing this right?
« on: April 02, 2022, 08:13:57 AM »
I have a small (approx. 10k) non-registered account holding only VCN.  I use adjustedcostbase.ca to track my ACB.  However, I am not confident that I am entering everything correctly.  The account has started to get bigger (increasing by about 5k a year) so I am getting more worried that I could be making an error.

My questions:

1. When it comes time to sell and I need to pay tax on my capital gains, I assume this is when ACB comes into play.  How exactly will the CRA know if I've been tracking everything correctly (possibly over a span of 20+ years)?  Do they calculate their own ACB somehow?  Is calculating the ACB solely for my benefit?  Would I ever be required to send in documentation of my ACB calculation?

2. I am often entering things like "Return of Capital" $0.01.  Do I actually need to enter this amount?  Is there a minimum amount I should be entering?

3. All I've entered in the past is when I buy shares, return of capital (from my T3 summary of investment income and expenses) and once, in 2018, a capital gains dividend.  My understanding is that I don't enter anything related to dividends (until I eventually buy more shares with them).  This year on my T3, I have new lines that aren't 0- Foreign Income, and Other Income (Interest Income).  These are not transaction options in ACB.ca, so am I just supposed to ignore them?

4. I've made this account joint, 50/50 split with my spouse (we make around the same income now and foresee making the same income in retirement).  Is there any downside to doing this?  If I need to change it, I'd rather do it now when the account has a low balance.

Thanks for your help!

Mighty Eyebrows

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Re: ACB - am I doing this right?
« Reply #1 on: April 03, 2022, 02:28:27 AM »
Those are all good questions, and ACB is always a puzzle for new investors. The first thing to think about is exactly what is "cost basis?" It is what you have legitimately paid for your investments. You are keeping track of your own funds so that you don't pay tax on that portion when you withdraw investments at some future date. The only way your ACB rises by 5k/yr is if you are putting an extra 5k/yr into VCN.

If there is return of capital, that is the fund company giving your own principal back to you, so the ACB for your investment has to go down.

If there is a phantom distribution, this is income that you received (on paper) that is automatically reinvested back into the fund. Therefore, it is tax-paid money that you have contributed to the investment, increasing your ACB. I note there is a phantom distribution reported for VCN in 2021.

For any other kind of income (dividends, interest, etc.), it does not change what you have invested, unless you turn around and buy more units of VCN.

1. When it comes time to sell and I need to pay tax on my capital gains, I assume this is when ACB comes into play.  How exactly will the CRA know if I've been tracking everything correctly (possibly over a span of 20+ years)?  Do they calculate their own ACB somehow?  Is calculating the ACB solely for my benefit?  Would I ever be required to send in documentation of my ACB calculation?

It is your responsibility to track your own ACB and report it on your tax return when you sell fund units. The CRA doesn't keep track themselves, but they can audit you to check that you are not cheating. They do have some red flags they look for to try to catch people who misreport.

2. I am often entering things like "Return of Capital" $0.01.  Do I actually need to enter this amount?  Is there a minimum amount I should be entering?

It is wise to keep track of all changes to your ACB, big and small. If you are doing it properly, the effort is not any different.

3. All I've entered in the past is when I buy shares, return of capital (from my T3 summary of investment income and expenses) and once, in 2018, a capital gains dividend.  My understanding is that I don't enter anything related to dividends (until I eventually buy more shares with them).  This year on my T3, I have new lines that aren't 0- Foreign Income, and Other Income (Interest Income).  These are not transaction options in ACB.ca, so am I just supposed to ignore them?

That sounds correct, but I wouldn't only use the T3 info. They usually do not report phantom distributions.

4. I've made this account joint, 50/50 split with my spouse (we make around the same income now and foresee making the same income in retirement).  Is there any downside to doing this?  If I need to change it, I'd rather do it now when the account has a low balance.

While many people do use a mixed joint account, it is best to keep separate "his and hers" accounts, although both can be joint for estate planning purposes - just make sure each spouse is the primary account holder on different accounts and contributions are kept seperate. If you mix and match who contributes to a joint account, there is a chance that CRA will attribute taxes to the higher income spouse.

You may have already read this paper on ACB:
https://www.pwlcapital.com/resources/as-easy-as-acb-understanding-and-tracking-your-adjusted-cost-base-with-etfs/


« Last Edit: April 03, 2022, 02:32:29 AM by Mighty Eyebrows »

Heckler

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Re: ACB - am I doing this right?
« Reply #2 on: April 03, 2022, 12:02:13 PM »

If there is a phantom distribution, this is income that you received (on paper) that is automatically reinvested back into the fund. Therefore, it is tax-paid money that you have contributed to the investment, increasing your ACB. I note there is a phantom distribution reported for VCN in 2021.



I'm also newby unregistered and doing my own taxes, I hope this thread can help.  Which T3 line is this phantom distribution you speak of? 

From my 2021 T3 for VCN, where I received $243.60 cash on Jan 10, 2022:

Jan 10 2022 Distribution: $478.58
ROC (42): $0.03
CAP Gains (21): $235.44
FGN INC (24/25): $1.03
Non-Eleg Div (23): 0
Eleg Div (49): $233.96
Fgn Tax (33/34):  0
Other (26):  $8.12

ROC + CAP Gains  + Other adds up to $243.60 (+/- $0.01) that I actually received in cash.   Does this mean of that total amount only $233.96 was considered "Eleg Div"?   

Mighty Eyebrows

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Re: ACB - am I doing this right?
« Reply #3 on: April 03, 2022, 05:21:42 PM »
Which T3 line is this phantom distribution you speak of?

Phantom distributions are not reported explicitly on the T3. Sometimes they match the capital gain line, but don't make that assumption without verifying it first. I suggest reading the ACB paper I linked above.

The CDS spreadsheets are the best way to get the proper ACB info, but the format is annoying. Using libreoffice, you have to disable macros and then tell it to display a hidden tab. Most (all?) ETF providers will also post the yearly breakdown on their websites but it isn't always easy to find.

https://services.cds.ca/applications/taxforms/taxforms.nsf/Pages/-EN-LimitedPartnershipsandIncomeTrusts?Open

A phantom distribution is an amount that you do not receive as a cash distribution, but that you pay tax on anyway.

Edit: For 2021 VCN had a "non cash distribution" of 0.23545 per unit as of Dec 31st, while the capital gain was 0.23443 per unit. It can vary a lot more than that some times. That doesn't include capital gains that are part of the other distributions (just Dec) so the yearly difference will be further out with what is shown on the T3.
« Last Edit: April 03, 2022, 05:55:57 PM by Mighty Eyebrows »

PharmaStache

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Re: ACB - am I doing this right?
« Reply #4 on: April 07, 2022, 01:09:12 PM »
Thank you for your help, as apparently the answer to my question was "Nope".  The white paper helped a lot.

What I've learned:
1. Even though my T3 says "Capital Gain Dividend", I should be putting this under "Reinvested Cap. Gain Dist"
                   -now I can see that when I enter this line, my ABC increased (and didn't just do nothing, as before)
2. I had the date wrong for a bunch of stuff, should have been using record date
3. My return of capital was all correct.
4. Final difference between the old way and new way was 0.30/share.

Final question: Do I actually need my T3 Summary of Investment Income and Expenses?  Everything on it just comes from the CDS spreadsheet, I think?

Now to research this whole joint account business (again)...
« Last Edit: April 07, 2022, 01:12:10 PM by PharmaStache »

Mighty Eyebrows

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Re: ACB - am I doing this right?
« Reply #5 on: April 07, 2022, 08:47:11 PM »
Final question: Do I actually need my T3 Summary of Investment Income and Expenses?  Everything on it just comes from the CDS spreadsheet, I think?

Yes, for ACB purposes you can get everything from the CDS info. I do check it against my T3 (or at least what is reported there) to make sure my brokerage is getting the same numbers that I am. I like to know if either I or they have made any mistakes.

Of course, we do need the T3 for reporting income taxes each year.

GreatLaker

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Re: ACB - am I doing this right?
« Reply #6 on: April 15, 2022, 03:33:53 PM »
1. Even though my T3 says "Capital Gain Dividend", I should be putting this under "Reinvested Cap. Gain Dist"
                   -now I can see that when I enter this line, my ABC increased (and didn't just do nothing, as before)
I'm a bit late to this thread, but maybe this can assist. Some of the capital gains you receive may be paid in cash and some of it may be reinvested. The total of cash and reinvested amounts will be in Box 21 Capital Gains on your T3. You will pay tax at the capital gains rate on all of it, in the year it is received (based on record date of the distribution). The difference is reinvested capital gains distributions (aka phantom distributions) get reinvested by the ETF company. If you don't raise your ACB for that amount you will pay tax on that amount again when you sell.

Quote
Final question: Do I actually need my T3 Summary of Investment Income and Expenses?  Everything on it just comes from the CDS spreadsheet, I think?

I use TDDI and I prefer to use my T3 Summary of Investment Income because it is easier than looking up and opening the CDS spreadsheets. I use AdjustedCostBase.ca for tracking ACB. Items I typically enter are buys, sells, RoC and reinvested (phantom) distributions. I get the RoC amounts from my T3 Summary of Investment Income. For reinvested (phantom) distributions, my TDDI statements always include a DRIP type transaction on the March statement, back dated to the Dec record date of the payment. Those transactions always have two entries, one distribution and one DRIP, with the same dollar value but opposite sign, one being a credit and the other being a DRIP.

scottish

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Re: ACB - am I doing this right?
« Reply #7 on: April 15, 2022, 04:14:08 PM »
You should also know about the T5008 slip.   When you sell something, your broker will issue a T5008 slip at tax time.    The slip will itemize the proceeds of the sale, expenses of the sale and an adjusted cost base.    You can also see the broker's opinion of you ACB on your account statement.   At least you can with my broker.

I usually find minor discrepancies between the ACB on the T5008 and the ACB in my spreadsheet.    Sometimes I can track these down and sometimes I can't.

If the shares/ETF units were transferred from another account, you'll likely have a major discrepancy in the ACB, presumably because the broker uses the price at the time of transfer as the cost base, instead of the original cost base from the old account.   The proceeds of sale always seem to be correct fortunately.

I always use the ACB from my records instead of the ACB reported on the T5008.   

It's interesting, US ETFs (i.e. they trade on a US stock exchange) don't seem to issue a return of capital or a "phantom" distribution that gets reinvested.   Does anyone know more about this?

Mighty Eyebrows

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Re: ACB - am I doing this right?
« Reply #8 on: April 15, 2022, 07:14:49 PM »
The difference is reinvested capital gains distributions (aka phantom distributions) get reinvested by the ETF company.

Just a note that some "non-cash distributions" may not be all from capital gains.

I use TDDI and I prefer to use my T3 Summary of Investment Income because it is easier than looking up and opening the CDS spreadsheets.

It is great that the T3 from TDDI details any non-cash distributions. The T3 summary I get from Questrade does not.

GreatLaker

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Re: ACB - am I doing this right?
« Reply #9 on: April 16, 2022, 09:19:59 AM »
The difference is reinvested capital gains distributions (aka phantom distributions) get reinvested by the ETF company.

Just a note that some "non-cash distributions" may not be all from capital gains.

I use TDDI and I prefer to use my T3 Summary of Investment Income because it is easier than looking up and opening the CDS spreadsheets.

It is great that the T3 from TDDI details any non-cash distributions. The T3 summary I get from Questrade does not.

I didn't say that non-cash distributions are on the T3 summary. RoC is on the T3 in Box 42, and broken out by each payment on the T3 Summary. Reinvested (non-cash) distributions are not separately listed on the T3; they are listed as transactions on the March TDDI statements, back dated to the Dec record date.  I'm interested if other brokers also list reinvested distribution transactions on monthly statements.

The income listed on the T3 in each box includes the total distributions for each income category, which may include cash and reinvested amounts.

Mighty Eyebrows

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Re: ACB - am I doing this right?
« Reply #10 on: April 16, 2022, 11:57:49 AM »
Reinvested (non-cash) distributions are not separately listed on the T3; they are listed as transactions on the March TDDI statements, back dated to the Dec record date.  I'm interested if other brokers also list reinvested distribution transactions on monthly statements.

Questrade doesn't break out non-cash distributions either on the monthly statements or on the summary attached to the T3. Also, the reported ACB on their T5008 form doesn't include either RoC or non-cash distributions.

(In case anyone else is reading this and wondering, non-cash distributions are a different issue from DRIP re-investments.)

GreatLaker

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Re: ACB - am I doing this right?
« Reply #11 on: April 16, 2022, 12:16:36 PM »
Questrade doesn't break out non-cash distributions either on the monthly statements or on the summary attached to the T3. Also, the reported ACB on their T5008 form doesn't include either RoC or non-cash distributions.

(In case anyone else is reading this and wondering, non-cash distributions are a different issue from DRIP re-investments.)

Interesting. Thanks. TDDI's T5008 ACB does include RoC and non-cash distributions, but it does not account for cost of disposition (selling commissions). You would not think it would be so hard for the various brokers to consistently get this stuff right.

P.S. on re-reading my first post, I can see how it might seem I was saying that non-cash distributions were on the T3 summary.

Heckler

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Re: ACB - am I doing this right?
« Reply #12 on: March 11, 2023, 02:58:48 PM »
Keeping ACB - am I doing this right? in one thread...

Lower-income spouse and high-income spouse (married), each have an Individual non-registered account. Low-income spouse invested 100% of income to VCN, bought monthly in the past two years. The high-income non-reg account is now starting. I am debating whether to buy “Identical property VCN” in both, or ZCN in the other.  Stock picking is not an option.

1 – to calculate ACB across both Individual accounts (married, but not joint accounts), if both hold VCN, will we have a single ACB, calculated with transactions from both accounts?

2 – Tax Loss Selling – Long-term hold plans and live off dividends (we are both under 50 years old but sick of working), not sure if it makes more sense to buy “Identical Property” in both accounts (VCN/VCN), or (VCN/ZCN). Thoughts on Superficial Loss rules during TLH events?   We're very secure in not panic selling during downtimes in TFSA/RSP, but would want to reduce capital gains taxes.

Making all attempts to minimize income taxes while both still working.

Thanks so much!

Mighty Eyebrows

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Re: ACB - am I doing this right?
« Reply #13 on: March 12, 2023, 06:36:38 PM »
1 – to calculate ACB across both Individual accounts (married, but not joint accounts), if both hold VCN, will we have a single ACB, calculated with transactions from both accounts?

Each individual tracks their own ACB separately. As a different issue, if one of you holds an ETF in two separate (taxable) brokerage accounts, the ACB is calculated across both accounts. It doesn't sound like you are in that situation.

2 – Tax Loss Selling – Long-term hold plans and live off dividends (we are both under 50 years old but sick of working), not sure if it makes more sense to buy “Identical Property” in both accounts (VCN/VCN), or (VCN/ZCN). Thoughts on Superficial Loss rules during TLH events?   We're very secure in not panic selling during downtimes in TFSA/RSP, but would want to reduce capital gains taxes.

You are right that tax-loss selling is made a little more complicated by spouses owning the same ETF. Also, if one of you controls a company (CCPC) then anything the company buys/sells would also affect that. My solution is to not do any tax-loss selling :-) The simplicity of a single asset allocation ETF (in our case XEQT) far outweighs any other issue I might have. Also, if my partner needs to take over (or executor some day), simple is good.

Heckler

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Re: ACB - am I doing this right?
« Reply #14 on: March 12, 2023, 07:27:17 PM »
Thanks @Mighty Eyebrows , #1 -that was my understanding as well, but I couldn't find any CRA references that clarified it so specifically.  Canadian Portfolio Manager blog also told me similar and suggested a joint account to hold one fund.  I also like your #2 solution to forget about harvesting losses.

The joint account is probably a much better plan for later in life when both incomes are more even and risk of one death is higher. Today, I'm focused on taxes, the other certainty in life!

Mighty Eyebrows

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Re: ACB - am I doing this right?
« Reply #15 on: March 13, 2023, 08:37:18 PM »
The joint account is probably a much better plan for later in life when both incomes are more even and risk of one death is higher. Today, I'm focused on taxes, the other certainty in life!

We have two joint taxable brokerage accounts: A "his" and "hers" where the other partner is jointly second-named, but funds only flow from the first-named person. I operate on the belief that ACB is calculated by the taxpayer and is not affected by the joint name unless they also contribute funds to the account.


Blissful Biker

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Re: ACB - am I doing this right?
« Reply #16 on: March 14, 2023, 09:49:28 AM »
Thanks for this advice!  Posting to follow.

I've been accumulating in a non-registered fund but need to figure out how to determine the ACB before I start decumulating next year.

Heckler

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Re: ACB - am I doing this right?
« Reply #17 on: April 03, 2023, 07:25:20 PM »
so, how do I add the Capital Gains Distributions [21] to my ACB?  (key being in my spreadsheet, not in adjustedcostbase.ca)

Say I own 998 Units of VCN with an ACB per share of $37.539, for a Total ACB of $37,464.

Then I get a cash distribution of $243.60, which is shown to be $0.03 ROC (42), $235.44 Cap Gain (21), $1.03 FGN Inc (24/25) and Eligible Dividend of $233.96.  OK, I'm being a little specific because it's rows 16 and 17 in the spreadsheet.

Actual math needed for the next row of Total ACB and ACB per share?

GreatLaker

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Re: ACB - am I doing this right?
« Reply #18 on: April 25, 2023, 06:37:44 PM »
I would use two lines, one for ROC and one for Reinvested (non-cash) Distributions

For ROC, subtract the total in Box 42 from your ACB. (Not sure if the $.03 is total or per share.)
Note that only works if you did not sell shares during the year. If you sold shares during the year you need the number of shares you held at each quarterly ROC distribution in order to correctly calculate the actual ACB of the shares you sold. Some brokers supply a  more detailed T3 document that breaks out all the quarterly income and ROC payments.


For Reinvested Distributions it may be more complex. Of the amount in Box 21, some of it may have been paid in cash and some of it may have been reinvested. Additionally some of the other income components like dividends or foreign income may have been reinvested too. You need to determine the actual amount that was reinvested, which may be different than the amount in box 21.

Go to the Distribution history section of Vanguard's web page for VCN and it shows there was a reinvested capital gains distribution of $0.352/share with a record date of 30 December 2022. That is the amount per share you add to your ACB. It does look like this year the reinvested distribution was 100% capital gains, but that is not always the case with every ETF.
https://www.vanguard.ca/en/investor/products/products-group/etfs/VCN

You can also see the same amount for VCN here: https://fund-docs.vanguard.com/distribution-history-en.pdf
and here: https://www.vanguard.ca/content/dam/intl/americas/canada/en/documents/Final%202022%20ETF%20CG%20News%20Release%20-%20English.pdf

Heckler

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Re: ACB - am I doing this right?
« Reply #19 on: June 20, 2023, 07:58:27 PM »
It's Junuary on the coast, so thanks for the ROC tips GreatLaker!   I turned the furnace on today, sitting at the computer looking at taxes.  Sigh....

I looked at his account (new in 2023), and the spreadsheet's ACB perfectly matched the brokerage's Average Cost.  However, her account is older and has Cap Gains and ROC, so I'm working through the formulas.  Fingers crossed I can make her's match the brokerage's too! 

Hopefully it's sunny and nice soon!