Box 42--Amount Resulting in Cost Base Adjustment

[Belguy]

The T3 slip, which I received from my discount broker, shows an amount in Box 42 of $42.39. The explanation for Box 42-Amount resulting in cost base adjustment-states that-"this amount represents a distribution or return of capital from the trust." It continues, "follow the instructions in the footnote area and adjust the cost base of the property at the end of the tax year. For more information, see information Sheet RC4169, 'Tax Treatment of Mutual Funds for Individuals'."

One problem is that there is nothing showing in the footnote area of the T3.

On the summary of trust income, which the broker included with the T3, the amount of $42.39 is shown in a column headed 'Return of Capital'.

Being a novice at this, can anyone explain to me how I need to proceed with this??

Many thanks!!

[0xCC]

Return of Capital reduces your cost base. As such you don't pay any tax on it in the year it is reported on a T3, you pay tax on it when you sell your investment. The exception to this is when your Return of Capital has reduced your ACB to 0, then you pay tax in the year it is reported on a T3. So as a DIY investor this is something you will have to track every year for non-registered investments.

[Eclectic12]

+1.

The main issue with the CRA link "Information Sheet RC4169, 'Tax Treatment of Mutual Funds for Individuals"
http://www.cra-arc.gc.ca/E/pub/tg/rc...tml#P289_13992
is that it combines both a sale of some units and the RoC part.

Here is a quick example using RioCan REIT:
Buy 200 units early Jan 2011 @ $21.95, commission of $9.99

Initial Adjusted Cost Base (ACB) = units x price + commission
= 200 x $21.95 + $9.99 = $4399.99

End of year T3 should have $172.41 or similar as distribution is $1.38 per unit, with 62.47% RoC.
http://investor.riocan.com/Investor-...n/default.aspx

End of year Adjusted ACB = old ACB - T3 box 42
= $4399.99 - $172.41
= $4227.58

ACB is still positive so other than reporting the other T3 boxes appropriately, there is nothing else to do.
If ACB were negative, the negative amount is reported as a capital gain, and the ACB is reset to zero.
http://www.taxtips.ca/personaltax/in...cometrusts.htm


Two notes:

a) The result is that when the units are sold, the capital gain to report will be higher as the RoC has reduced the cost.

b) Be careful about the term ACB. Most web sites/posters mean "ACB per unit" but CRA on schedule 3, column 3 of the tax return uses ACB *for the total number sold*.

Using the fictional 200 RioCan units to illustrate, if 50 are sold in late Dec 2011 - most people will call ACB as $4227.58 divided by 200, or $21.13 while CRA on schedule 3, column 3 wants 50 x $21.13, which is $1056.89 - two different numbers!


Cheers

[Belguy]

Thank you for the replies. You have to have your engineer's papers to understand this adjusted cost base situation. The only solution for some dummy like me, that I can think of, is to just hold my ETF's forever and never sell them because I won't know what to do!! Someone once wrote on this forum that people like me, who can't deal with the tax reporting, should not invest in stocks in the first place and perhaps they are right.

When I do decide to sell, will a professional tax preparer be able to handle it for me and will I need to take my previous T3's in for every year that I held on to the stocks? Most of these ETF's were actually purchased many years ago but I have held on to my previous years' T3 slips.

[0xCC]

You need to keep your T3's (and monitor them so that if/when your ACB goes to 0 you start paying tax on the RoC). Also, holding just ETFs isn't going to save you I don't think since it is possible for them to generate RoC as well. The only safe way to avoid the tax issues related to RoC is to hold the shares/units in a registered account (RSP or TFSA).

[Belguy]

Or just hold mutual funds, instead of individual stocks and ETF's, in your non-registered accounts.

[caricole]

Belguy...When I do decide to sell, will a professional tax preparer be able to handle it for me and will I need to take my previous T3's in for every year that I held on to the stocks? Most of these ETF's were actually purchased many years ago but I have held on to my previous years' T3 slips

The best thing to do is bring your ACB up to date since the day of purchase, and after that once a year...for etf's etc

This is the «INVESTORS ACCOUNTING»

If your accounting is up to date you know at all times your ACB and the ACB per unit

So if you sell...the difference between disposition and your last ACB becomes capial gain or loss

Very simple...for ROC do you updating once a year..in April....backdating to Dec 31 previous and new ABC dated Jan 1st

This way no tax professional has to charge 100$/hour to look up your old T3's

my opinion

[Eclectic12]

Thank you for the replies.

You have to have your engineer's papers to understand this adjusted cost base situation. The only solution for some dummy like me, that I can think of, is to just hold my ETF's forever and never sell them because I won't know what to do!!
[ ... ]

When I do decide to sell, will a professional tax preparer be able to handle it for me and will I need to take my previous T3's in for every year that I held on to the stocks? Most of these ETF's were actually purchased many years ago but I have held on to my previous years' T3 slips.

Holding might not be the solution you think it is. If the ETF unit ACB is negative, you have to report the RoC as a capital gain in the same tax year! Then too - trying to get the info you need years later is tough/painful!

So the sooner you take care of it the better!


Bear in mind that scrambling to learn the tax bits plus trying to get the information together is making this all seem much worse than it actually is. If you learn the ropes then setup a system to stay on top of it, IMO it's not that much more difficult than say, reconciling a monthly credit card statement. The main two keys are to understand what the tax implications (plus bookkeeping required) for each type of investment and to keep good records.

At the end of the day - all the ACB boils down to is to track the cost of the investment and adjust it for any taxable events that modify it. So I'd recommend building your investment tax knowledge a bit at a time. Start with the easy case of a stock that does not pay income (ex. RIM). When you've walked through what the tax implications are (i.e. track ACB, report CG or CL for sales on schedule 3 of tax return), then the next version of stock that pays eligible dividends (ex. BNS). Keep repeating until you've made it to the ETF/trust/MF that pays several different types of income.

As you work your way through, you will see that a good 80%+ is all the same simple calculations. There's just a few extra that each additional type adds.

Another option is to check out the tax books in your library for one that provides examples of the different types of investments/tax reporting. This helped when I started and most of my tax pain came from assuming royalty trusts were treated the same way as a stock, without learning about RoC!


Yes - the T3's are likely to be needed. Whomever is doing the calculations and tax return is going to need the T3 for the tax return being filled out - whether the ETF was sold or not. In a tax year that the ETF is sold, the T3 will help for the RoC by documenting it. If not, assuming the company still exists and is keeping the info on their web site, the investor section can provide a breakdown as well. Here is an example from the Chartwell Seniors Housing REIT:
http://www.snl.com/Cache/1001164074....FID=1001164074


Finally - there is a good reason to learn this, even if you pay someone to do the tax return. Namely, if they make a mistake, CRA goes after you! I'd rather be in trouble with the CRA for my own mistakes.


Cheers

[Eclectic12]

Or just hold mutual funds, instead of individual stocks and ETF's, in your non-registered accounts.

MF's aren't necessarily a fix.

For example, the CIBC Balanced, Dividend Income, Global Monthly Income and Monthly Income all paid RoC last year. Most of the managed portfolio funds also did the same.
https://www.cibc.com/ca/pdf/mutual-f...nds-mps-en.pdf

Then too, as the prospectus indicates:

Keep in mind that if you hold your fund in a non-registered plan, fund distributions are included in your taxable income, whether you receive them in cash or reinvest them.

Then too - most stocks are easier for tax bookkeeping and reporting than an ETF or MF.

When I bought/sold RIM two years apart, it was one ACB calculation on the buy and two years later, one tax return schedule 3 Capital Gain to report for a total of two calculations.

The TRP shares I bought ten years ago have a yearly T5 to report the dividends and I think I bought more shares twice. So over eleven years or so, that's three ACB calculations plus the once a year T5 reporting on the tax return.


Cheers

[OhGreatGuru]

Or just hold mutual funds, instead of individual stocks and ETF's, in your non-registered accounts.

As someone else stated, you can have RoC from mutual funds too.

In any non-registered account you need to keep track of ACB for each security. You need to do this on an ongoing basis as any transactions are made. (you can calculate it after the fact if you keep a copy of every financial statement you ever received, but that can be quite a job.). Unless you have a full-service investment account where a manager is keeping track of this for you, most financial institutions will tell you that keeping track of ACB is your responsibility. They may report an "average unit cost" to you, but they will not guarantee that it matches your ACB; partly for liability reasons, and partly because you may have transaction costs that they are not aware of.

I'm sure there are other threads here on how to keep track of ACB.