Adjusting ADJUSTED COST BASE

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DavidR
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Re: Adjusting ADJUSTED COST BASE

Post by DavidR »

like_to_retire wrote:I don't have a horse in this race, so I don't really care, I'm just trying to help. I don't want others to make the same mistake you're making, so I made my posts and others can act as they see fit. :)

ltr
Agreed, caricole is doing it incorrectly.

1. On the one hand, thanks to caricole for raising the topic. (As you can see we've had discussions in previous years, but none recently. So your reminder is very timely.)

2. I too don't want to see others following incorrect advice.
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Re: Adjusting ADJUSTED COST BASE

Post by adrian2 »

FYI, caricole, as a newbie here, you may not be aware that David is a very experienced accountant who knows what he's talking about.

Like_to_retire is another experienced poster. By all means, challenge us if you think you're right, but expect to be challenged when some of us think you're wrong.We're all here to learn!
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Re: Adjusting ADJUSTED COST BASE

Post by IdOp »

caricole wrote:First table goes till Dec 23th
The first table contains all distributions for 2011. The total of the four 2011 distributions in the first table is $1.06389 (per unit). This is the same total shown in the second table.

The total capital gain distribution of $0.81738 from table 2 consists of two parts: $0.81689 of it is a reinvested captial gain distribution (see table 1); the difference of $0.00049 thus had to have been paid out as part of the four cash distributions (not reinvested) for 2011.

The reinvested portion, $.081689 per unit, should be added to the costbase. BUT:

It makes no sense to add the cash distribution part, $0.00049 per unit, to the cost base. It's not a matter of not being taxed twice. It's a matter of being taxed once rather than zero times on it. If you add it to the cost base, you're in effect creating a future tax credit (upon sale) which will negate the tax paid on the distribution now (i.e., for 2011).
Last edited by IdOp on 22 Mar 2012 18:12, edited 1 time in total.
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Re: Adjusting ADJUSTED COST BASE

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2. I too don't want to see others following incorrect advice
Fine...how will you treat ACB from box 42 and box 21....in order not to be taxed twice on disposition after having reported capital gains you never recieved

What are the figures you would be using on XCS 2011 and thus overruling the T3 provided for tax purposes ??? with of course an explanation to ARC included with your incometax filing

Where will the difference go?

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Re: Adjusting ADJUSTED COST BASE

Post by like_to_retire »

how will you treat ACB from box 42 and box 21....in order not to be taxed twice on disposition after having reported capital gains you never recieved
It's easy.

Box 42 is ROC. Subtract it from your ACB.

Add the re-invested amount from the tables to your cost base. Box 21 has nothing to do with your ACB.

Report your T3 on your income tax forms.

That's it. You won't be taxed twice.

ltr
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Re: Adjusting ADJUSTED COST BASE

Post by adrian2 »

caricole wrote:to me , everything balances..
I still maintain that iShares is creating a lot of headaches with their reinvested distributions and just hope Vanguard Canada won't have the same pattern.

On this forum, there are some of the most financially savvy Canadians, and we still have to rehash similar discussions every year. Even worse, imagine if you made purchases and/or sells throughout the year, and the calendar year numbers need to be split across quarterly ones. Aaargh...
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Re: Adjusting ADJUSTED COST BASE

Post by IdOp »

adrian2 wrote:I still maintain that iShares is creating a lot of headaches with their reinvested distributions and just hope Vanguard Canada won't have the same pattern.
Other trusts also do this. Basically it's a way to spit out a tax liability where they have no cash to distribute for it. It can lead to complexity and confusion, unfortunately, especially when the reporting is incomplete or delayed. Still, I do wish ETF providers would create an option for reinvesting all distributions via a different series. I guess that would lead to marginally higher costs and less liquidity though.
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Re: Adjusting ADJUSTED COST BASE

Post by adrian2 »

IdOp wrote:
adrian2 wrote:I still maintain that iShares is creating a lot of headaches with their reinvested distributions and just hope Vanguard Canada won't have the same pattern.
Other trusts also do this. Basically it's a way to spit out a tax liability where they have no cash to distribute for it.
Why is it that no open ended mutual funds (AFAIK) need to do this?
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Re: Adjusting ADJUSTED COST BASE

Post by caricole »

You do NOT add the capital gain amount to your ACB.
You only add REINVESTED distributions.
They are not the same thing. And, for many of the different funds, they are not the same AMOUNT.

Not all Capital gains were reinvested. Some were distributed in Cash during the year.
http://ca.ishares.com/content/stream.js ... cation/pdf
Scroll down your list in the your link you provided

The «Réinvested distributions» match 100% the «Capital gains to be declared» ....with sometimes a «minuscule difference» as in XSC....difference of 5¢ for 1.000 shares
ScreenShot01235.jpg
PS:

Idealy, the T3 should have an additionl box...with the explanation opposite to box 42

Amount to be added to ACB, and this would clear up the matter

But since it would save some taxes to some investors....ARC is not interested
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Re: Adjusting ADJUSTED COST BASE

Post by IdOp »

adrian2 wrote:Why is it that no open ended mutual funds (AFAIK) need to do this?
Good question. My guess would be that (a) most mutual fund investors probably choose to reinvest their distributions (I recall that you're an exception to that!), so for the most part they can "pay it out and take it right back" (no need for cash), and (b) for the cash they do need to really pay, it's probably easier for a mutual fund to raise it, either from cash inflows if there are any, or by selling securities which is more their thing than it is for an ETF. Those are top-of-the-head ideas, maybe there are other factors I'm overlooking.
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Re: Adjusting ADJUSTED COST BASE

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caricole wrote:
You do NOT add the capital gain amount to your ACB.
You only add REINVESTED distributions.
They are not the same thing. And, for many of the different funds, they are not the same AMOUNT.

Not all Capital gains were reinvested. Some were distributed in Cash during the year.
http://ca.ishares.com/content/stream.js ... cation/pdf
Scroll down your list in the your link you provided The «Réinvested distributions» match 100% the «Capital gains to be declared» ....with sometimes a «minuscule difference» as in XSC....difference of 5¢ for 1.000 shares
> Scroll down some more, to XRB. Reinvested distribution $0.48616 per unit. Capital gain for the year $0.01809

Not a miniscule difference. The point is, they are not the same thing. Sometimes the amounts are close, sometimes they are not.

If you want to take a 'short-cut' by assuming they are the same, you' may very well be close enough most of the time, but you won't be doing it 'correctly'.
caricole wrote:PS:

Idealy, the T3 should have an additionl box...with the explanation opposite to box 42

Amount to be added to ACB, and this would clear up the matter

But since it would save some taxes to some investors....ARC is not interested
I agree, CRA can be very one-sided. As another example, the T5 slip for a Margin account will show the interest INCOME, but never the Expense !
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Re: Adjusting ADJUSTED COST BASE

Post by DavidR »

IdOp wrote:
adrian2 wrote:Why is it that no open ended mutual funds (AFAIK) need to do this?
Good question. My guess would be that (a) most mutual fund investors probably choose to reinvest their distributions (I recall that you're an exception to that!), so for the most part they can "pay it out and take it right back" (no need for cash), and (b) for the cash they do need to really pay, it's probably easier for a mutual fund to raise it, either from cash inflows if there are any, or by selling securities which is more their thing than it is for an ETF. Those are top-of-the-head ideas, maybe there are other factors I'm overlooking.
I think you've mostly nailed it, IdOp.

IIRC, one or more of the iShares trusts had massive capital gains a number of years ago (due to changes in the Index I guess), but they wanted to remain 'fully invested'. They would have had to sell shares near year end to fund a cash distribution of the capital gain.
I think that's when I first became aware of the Reinvested distributions for iShares.

Reinvested distributions are easy to spot for open-ended funds, because the number of units you own goes up. So anyone tracking their investments in Quicken or Excel or whatever will see that something has happened... And that investigation should lead them to the conclusion that they need to adjust their cost bases by the amount of reinvested income and capital gains.

iShares of course can't issue fractional shares... I think many investors and tax preparers have missed the fact that the T3 slips can include capital gains (and other types of income - see XRB for example!). Only someone trying to reconcile the T3 slip to the cash payments received would 'stumble' across the difference... (Or someone closely reading the explanatory info that iShares may or may not have been sending out all these years...)
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Re: Adjusting ADJUSTED COST BASE

Post by IdOp »

Thanks for the additional comments DavidR. Yes, it occurred to me after posting that keeping the number of units fixed isn't a constraint that mutual funds have. Perhaps for all these reasons, mutual funds didn't do it historically and have continued to follow that formula. ETFs came along later and had to do it differently. Mutuals could do it the ETF way I guess, and there would be advantages to that ... but at the cost of confusion. I was going to say mutual fund investors on average may be less experienced than ETF investors, so confusion would be particularly bad ... but I don't know if that's true anymore even if it ever was, as ETFs are mainstream now!
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Re: Adjusting ADJUSTED COST BASE

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Scroll down some more, to XRB. Reinvested distribution $0.48616 per unit. Capital gain for the year $0.01809
I agree....this is the onlyone with a noticable difference

Here are the only 3 for 2011, with differences for 1.000 Shares

XCS...816,89..........816,94......0,05$ difference...ACB add 816,89

XCV...227,29..........227,65..... 0,36$ difference...ACB add 227,29

XRB...486,16..........18,09......468,07$ difference..ACB add 486,16

All the other IShares

No reinvested distribution...no capital gains to report...no ACB to be done

If reinvested distribution = capital gain....to report and increase ACB by same amount
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Re: Adjusting ADJUSTED COST BASE

Post by adrian2 »

caricole wrote:All the other IShares

No reinvested distribution...no capital gains to report...no ACB to be done
Cost base also needs to be adjusted (in the other direction!) if the ETF pays a cash distribution being ROC (return of capital).
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Re: Adjusting ADJUSTED COST BASE

Post by queerasmoi »

like_to_retire wrote: It's easy.

Box 42 is ROC. Subtract it from your ACB.

Add the re-invested amount from the tables to your cost base. Box 21 has nothing to do with your ACB.

Report your T3 on your income tax forms.

That's it. You won't be taxed twice.

ltr
I would still say that, based on the iShares method of accounting - Box 42 is already equal to (ROC - amount you add to ACB in order to account for reinvested). This is at least how it matches up based on the distribution amounts found in 2009_distributions_breakdown_EN.pdf which I saved on my computer at the time. So if you subtract iShares' Box 42 *and* add the re-invested amount, now you're double counting the reinvested amount.

Just to rehash the numbers I placed upthread, with the correction that I had 186 shares XSB and not 189.
Actually 2009 T3 from Credential is a useful example. The only CG distribution that appears is for 186 shares of iShares XSB on 12/30/2009, in the amount of $13.35 (Box 21). The same distribution contains $50.00 of other income (box 26) and -$7.76 (negative) in Box 42 (amount resulting in cost base adjustment), for a total of $55.60 which is exactly how much cash they gave me on that day.
The Q4 2009 distribution in question appears on their 2009 breakdown as follows:
Cash 0.29893, Reinvested 0.07180, Total 0.37073, Eligible 0, Non-eligible 0, Other 0.26883, CG 0.07180, RoC 0.03010, Foreign 0

The number in Box 42 was -$7.76. If you take (RoC - Reinvested) you get -0.0417 per unit or $-7.76 for 186 shares. If I had adjusted by Box 42 *and* again by the reinvested amount, I definitely would have been double counting the reinvested amount.
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Re: Adjusting ADJUSTED COST BASE

Post by like_to_retire »

queerasmoi wrote:I would still say that, based on the iShares method of accounting - Box 42 is already equal to (ROC - amount you add to ACB in order to account for reinvested).
No, the ROC is subtracted from your cost base. It's capital they're returning to you in cash, so it lowers the cost base.
The re-invested amount is never actually paid to you, it's used to purchase more shares, so it increases your cost base and so must be added to the ACB. The tax characteristics of the re-invested amount can be anything from capital, to dividend, income, ROC, etc. It matters not - it's simply added to the cost base. It's shown as being paid to you on your statements, and then shown as being taken away.

There's nothing for you to calculate. You simply report everything that's on your T3, except for the Box 42, which is not reported, but is there as a convenience so you know how much to reduce your cost base. The re-invested amount is not broken out on the T3, so you need to go to the web site or look at your statements and find out the re-invested amount to know how much to increase you cost base.

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Re: Adjusting ADJUSTED COST BASE

Post by queerasmoi »

like_to_retire wrote: No, the ROC is subtracted from your cost base. It's capital they're returning to you in cash, so it lowers the cost base.
The re-invested amount is never actually paid to you, it's used to purchase more shares, so it increases your cost base and so must be added to the ACB. The tax characteristics of the re-invested amount can be anything from capital, to dividend, income, ROC, etc. It matters not - it's simply added to the cost base. It's shown as being paid to you on your statements, and then shown as being taken away.

There's nothing for you to calculate. You simply report everything that's on your T3, except for the Box 42, which is not reported, but is there as a convenience so you know how much to reduce your cost base. The re-invested amount is not broken out on the T3, so you need to go to the web site or look at your statements and find out the re-invested amount to know how much to increase you cost base.

ltr
I am not sure why you are saying no to what I wrote. You have not contradicted it.

Let me clarify that was a minus sign, not a dash. Based on the iShares method of accounting - Box 42 is already equal to (ROC minus the amount you add to ACB in order to account for reinvested).

So what I'm saying is, if every fund calculates like my iShares did in 2009, you don't have to make a separate adjustment for re-invested distributions because they are already subtracted from ROC in Box 42.

Box 42 = ROC minus reinvested amount
So when I subtract Box 42 from my ACB, that means I'm subtracting ROC and adding the reinvested amount. If I make a separate adjustment for the reinvested amount then I'm double counting.
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Re: Adjusting ADJUSTED COST BASE

Post by Jaunty »

This data from iShares gives you the tax characteristics for all the iShares ETF distributions for 2011. This may have been linked elsewhere, but it is from this that I take all my adjustment information. http://ca.ishares.com/content/stream.js ... cation/pdf
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Re: Adjusting ADJUSTED COST BASE

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Thanks, Jaunty.

What continues to puzzle me is why iShares XCS reports two counterbalancing items:
1. Return of capital on every quarterly distribution paid in cash, including December
2. Reinvested distribution in December

#1 decreases ACB, #2 increases ACB -- if there is a need for #2, how can it be a need for #1 at the same time? See December 2011, kind of sucking and blowing at the same time...

BTW, this kind of detailed breakdown of quarterly distribution is only available after year end (as per message on their site), so, arguably, if #2 is declared for the calendar year, there should be no #1 in any of the quarterly breakdowns (sucking and blowing).
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Re: Adjusting ADJUSTED COST BASE

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adrian2 wrote:Thanks, Jaunty.

What continues to puzzle me is why iShares XCS reports two counterbalancing items:
1. Return of capital on every quarterly distribution paid in cash, including December
2. Reinvested distribution in December

#1 decreases ACB, #2 increases ACB -- if there is a need for #2, how can it be a need for #1 at the same time? See December 2011, kind of sucking and blowing at the same time...

BTW, this kind of detailed breakdown of quarterly distribution is only available after year end (as per message on their site), so, arguably, if #2 is declared for the calendar year, there should be no #1 in any of the quarterly breakdowns (sucking and blowing).
All the funds with ROC (even those without December reinvested distributions) seem to allocate the ROC proportionately to cash distributions during the year. I don't know if CRA 'requires' it or whether it is just a generally accepted practice in the industry, but it does make sense to me (although it makes for tedious bookkeeping)! XCS holds some REITS and receives distributions during the year that are paid back out every quarter, so arguably when an Unitholder of XCS gets a quarterly cash distribution, part of it should be reported as ROC. Obviously XCS doesn't know how much of it is ROC until later, when the REITs report their tax figures, and XCS figures out its own taxes and ROC from 'creation units' if applicable, etc...
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Re: Adjusting ADJUSTED COST BASE

Post by queerasmoi »

adrian2 wrote:Thanks, Jaunty.

What continues to puzzle me is why iShares XCS reports two counterbalancing items:
1. Return of capital on every quarterly distribution paid in cash, including December
2. Reinvested distribution in December

#1 decreases ACB, #2 increases ACB -- if there is a need for #2, how can it be a need for #1 at the same time? See December 2011, kind of sucking and blowing at the same time...

BTW, this kind of detailed breakdown of quarterly distribution is only available after year end (as per message on their site), so, arguably, if #2 is declared for the calendar year, there should be no #1 in any of the quarterly breakdowns (sucking and blowing).
I suppose that if you get a ROC of X dollars and then a reinvested CG of X dollars, in total it's equivalent to just distributing X dollars (non-reinvested) as CG, right?

Perhaps it's because investors who sold the fund partway through the year already received the ROC in cash, and the capital gains can't be backdated to those earlier distributions.
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Re: Adjusting ADJUSTED COST BASE

Post by caricole »

DavidR...so arguably when an Unitholder of XCS gets a quarterly cash distribution, part of it should be reported as ROC. Obviously XCS doesn't know how much of it is ROC until later, when the REITs report their tax figures, and XCS figures out its own taxes and ROC from 'creation units' if applicable, etc...
The difference between Mutual funds und IShares indexfunds as described by IShares

Mutual Funds increases de number of oustanding shares and add them to you portfolio

IShares do not increase de number of outstanding shares....rebalaces the index once a year (on Dec. 31th) by selling and buying thus creating sometimes capital gains....which you have to report

Since you are taxed on these capital gains (reinvested amounts)...you increase your ACB to reflect the change in value and not to be taxed twice on the same amounts

Brokers mostly update the value of your IShares in your portfolio according to box 42 but not always take into account the second adjustment....the increase created by reinvested amounts

For these reasons....the increase in ACB is often overloocked and on diposal of the IShares you would declare a CG to high or a CL to low
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Re: Adjusting ADJUSTED COST BASE

Post by DavidR »

caricole wrote: Mutual Funds increases de number of oustanding shares and add them to you portfolio
> Only if you ask for your distributions to be reinvested. Some people prefer to take them in cash.
caricole wrote:IShares do not increase de number of outstanding shares....rebalaces the index once a year (on Dec. 31th) by selling and buying thus creating sometimes capital gains....which you have to report
>I don't believe iShares funds wait until Dec 31 to rebalance. iShares funds make the changes whenever the index changes. And the index can change more than once per year if there are takeovers and mergers etc...

Since the iShares funds are legally organized as Trusts, they have to allocate all of the year's income to the unitholders by their Year end. That is why the reinvested distribution occurs in December.
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Re: Adjusting ADJUSTED COST BASE

Post by adrian2 »

queerasmoi wrote:I suppose that if you get a ROC of X dollars and then a reinvested CG of X dollars, in total it's equivalent to just distributing X dollars (non-reinvested) as CG, right?
Yes.
queerasmoi wrote:Perhaps it's because investors who sold the fund partway through the year already received the ROC in cash, and the capital gains can't be backdated to those earlier distributions.
But, "The characterization of distributions for tax purposes (such as dividends, other income, capital gains etc.) for each period will be reported only after the Fund's tax year end. "

So the investors who have sold the fund partway through the year will not have the info to calculate the distribution breakdown and their gain or loss until past end of year anyways, so why declare ROC and reinvested distributions for the same year?
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