# How are tax cap gains calculated on TD e-series funds?



## globe3 (May 15, 2011)

Hi all,

I recently started investing in TD e-series funds, with bi-weekly automated PPP's of $500/payment spread across over 4 index funds. If I decide to cash out my funds sometime before retirement (i.e. let's say in the next 3-4 years), how do I calculate the capital gains for tax purposes since all of my purchases have been at different fund prices spread across so many different time frames?

Some have recommended manually tracking all the ACB's and price points at each payment date, which seems a bit cumbersome and overly complicated to me. Others have suggested simply using the book value as the cost base, which I tend to agree more with.

So say for example, the total market value of my fund is $5610 and my book value (total cost/amount paid) is $5500 - if I cash out the entire fund, I'd have a $110 taxable capital gain. Makes sense to me.

However, what if I decide to cash out the fund at different increments? Say, I cash it out $2000 one day, and $2000 another day, and the remainder $1610 weeks later. How do I calculate the cost base for each transaction then? 

Any help would be greatly appreciated - thanks!


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## CanadianCapitalist (Mar 31, 2009)

If your investments are in a taxable account, you have to calculate your ACB. You don't have a choice unfortunately. 

Here's a spreadsheet that you can use. 

http://www.canadiancapitalist.com/free-acb-capital-gains-tracker-in-excel/


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## OhGreatGuru (May 24, 2009)

You have to track your ACB.

For a no-load bank mutual fund the Book value on your statements will probably be an accurate reflection of your ACB, but my statements all come with a disclaimer saying they don't guarantee it. I would just use it as a check to see if your spreadsheet is set up properly.


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## OhGreatGuru (May 24, 2009)

globe3 said:


> ...
> 
> However, what if I decide to cash out the fund at different increments? Say, I cash it out $2000 one day, and $2000 another day, and the remainder $1610 weeks later. How do I calculate the cost base for each transaction then?
> 
> ...


ACB is used a bit loosely - Depending on the context it can be either the aggregate ACB of all the shares, or the ACB per share. The ACB/share is the important one. When redeeming only part of the holdings, as long as you know the ACB/share you can claculate you capital gain/loss on any number of shares you sell in a transaction.


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## globe3 (May 15, 2011)

Thanks very much everyone!


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## Kaitlyn (May 13, 2011)

In that linked spreadsheet - what was the ROC - $2.00 ?


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## zylon (Oct 27, 2010)

*Return of Capital* $2 per share = $400


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## Kaitlyn (May 13, 2011)

zylon said:


> *Return of Capital* $2 per share = $400


Hmm.. not sure I actually know WHAT that is though...


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## zylon (Oct 27, 2010)

> What Does Return Of Capital Mean?
> A return from an investment that is not considered income. The return of capital is when some or all of the money an investor has in an investment is paid back to him or her, thus decreasing the value of the investment.
> 
> This is not considered an investment gain of any type because it is not in excess of the original investment. Investors are not taxed on this return until it begins to exceed their original investment value. Investopedia


The amount of ROC will show up in your brokerage statement and also on your T3 slips.


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## Eclectic12 (Oct 20, 2010)

OhGreatGuru said:


> ACB is used a bit loosely - Depending on the context it can be either the aggregate ACB of all the shares, or the ACB per share. The ACB/share is the important one. When redeeming only part of the holdings, as long as you know the ACB/share you can claculate you capital gain/loss on any number of shares you sell in a transaction.


I think a large part of the vague terminology is Canada Revenue Agency's fault.

Ever article or book I'd read defined Adjusted Cost Base (ACB) as per share.
The first time I ran into the aggregate ACB was on the tax forms where the label is ACB but when you work through the calculation - aggregate ACB for the share sold is used.

I personally would prefer sticking the to he ACB/share version. This two types is confusing. Then too - if the sale is partial, one needs to know the ACB/share in order to report the correct "ACB" on the tax forms.


Cheers


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## Eclectic12 (Oct 20, 2010)

zylon said:


> What Does Return Of Capital Mean?
> A return from an investment that is not considered income. The return of capital is ... Investopedia


Hmmm ... I find the RoC definition from Investopedia a little misleading or incomplete in a couple of places.


First it makes no mention of the capital gains taxes paid on the RoC, when the investment is sold, assuming the ACB is positive.

Consider what happens when I buy at $10 / share, am paid $2 / share RoC and then sell for $15. I'm ignoring commissions to make the example easier to follow.

The original investment value and starting ACB is $10 /share.
Then the $2 RoC is paid.
The ACB is recalculated as $10 - $2 giving an ACB of $8 / share. 
The RoC is positive, no tax is due for the $2 RoC when paid.
I sell for $15 / share.
On my tax forms, I report the ACB of $8 / share - which adds the $2 / share RoC as taxable capital gain.

The bottom line is that while tax may not be due on the RoC at payment, it does still get taxed. The RoC is still a good deal as it is taxed the least as a capital gain and is likely deferred.


Secondly - if the ACB becomes negative, part or all of the RoC payment has to be reported as a capital gain, until another event such as buying more shares resets the ACB to be positive. 

In practice, this does not happen often as the RoC payments would have to be large but some investments like REITs can have large parts of their payments as RoC. For example, Rio-Can's tax table indicates reductions of ACB of 30 to 61%.
http://investor.riocan.com/Investor-Relations/distribution-info/Income-Tax-Information/default.aspx


Thirdly - I'm not so keen on the term "original investment value". This implies the original price paid instead of the current ACB. 

Going back to my example, I'm concerned that some would compare the $2 RoC to the $10 / share cost and conclude no taxes are due. Instead it is the current cost or ACB that is the comparison.


Here are a couple of blog entries for those with inquiring minds:
http://howtoinvestonline.blogspot.com/2009/01/etfs-and-mutual-funds-calculating.html
http://howtoinvestonline.blogspot.com/2010/07/return-of-capital-separating-good-from.html


Cheers


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## humble_pie (Jun 7, 2009)

you're right, eclectic. Thank you for taking the trouble to spell all this out.

eventual taxation of return of capital as capital gains - because it's used to write down the cost base when received - is an issue that's perhaps not well enough understood.

if investopedia is in error here, that's a great shame.

you've also addressed a secondary issue successfully, which is how to handle additional returns of capital after cost base has been written down to zero. Here is what you said & it's bang-on:

_" ... if the ACB becomes negative, part or all of the RoC payment has to be reported as a capital gain, until another event such as buying more shares resets the ACB to be positive."_


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> you're right, eclectic. Thank you for taking the trouble to spell all this out.
> 
> eventual taxation of return of capital as capital gains - because it's used to write down the cost base when received - is an issue that's perhaps not well enough understood.
> 
> ...


I was torn as to how much to include. On one hand, it is hard to cover adequately with a fair amount of detail but on the other hand, especially with the way Investopedia words it (or at least what was quoted), there could be issues.

As for Investopedia - the part that was quoted was not so much wrong, per se but misleading or incomplete. It's similar to other statements I've read where "RoC payments aren't taxed", where in fact - there is no free lunch, it is a question of when they are taxed.


Thanks for the feedback as I'm detail orientated so sometimes I include too much.


The secondary issue is why I read this forum. 
It was through comments here that I did some research and found out that this was the requirement. It was a bit of a shock as I have a fair number of REITs at the time and had no idea of the RoC part.


Cheers


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