# ETF taxation



## leeder (Jan 28, 2012)

I'm a bit confused with how to report the tax on my US ETF. I purchased 800 units of VFV at $25.00 (with $9.99 commission from TDW). I received 0.14944/unit distribution on January 3. With the synthetic DRIP, I got 4 additional units @ $25.52. Based on Vanguard Canada's website of VFV, it breaks down the distribution as the following:

RoC: $0.0302
Foreign income: 0.13814
Foreign tax paid: 0.02072

I'm no tax guru (and not that much better with math), so I'm just wondering if someone can help me break down the ACB after the distribution. Also, would it be in the T3 where TD/Vanguard breaks down the foreign income between regular income and capital gain? Thanks.


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## Eclectic12 (Oct 20, 2010)

First - according this link, the ETF ACB formula using totals instead of per unit is that:
ACB = total paid (including commission) + reinvested dividends/distributions - RoC - ACB of any sold 

http://www.taxtips.ca/personaltax/investing/taxtreatment/etfs.htm

IMO, it's easier to follow by breaking it down by when each event happens instead of trying lump everything into one formula. So that's what I'm going to walk through below. 

The first event is the original purchase, where ACB = total paid as everything else is zero = (units x price) + commission = $20009.99

It appears that only cash was distributed with nothing re-invested, so RoC is the only factor for updating the ACB at this stage, when the distribution was paid.
https://www.vanguardcanada.ca/individual/etfs/etf-distribution-history.htm?portId=9563

ACB after distribution = Purchase ACB - (RoC per unit x number of units) = $20009.99 - (800 x $0.0302) = $19985.83

Then the DRIP bought the 4 additional units:
ACB after DRIP = ACB after distribution + (number units x price) = $20034.15 + (4 x $25.52) = $20087.91


This way you should be able to keep straight when new units are appearing and be sure when those addition units are going to pay more distributions, which may also include more RoC.


I'd expect a T3 with a matching summary form that breaks down the totals recorded on the T3 form. At least that's what I'm getting from TDW for both a Canadian ETF and a REIT that has foreign income. This makes it simple for the tax return if one is using tax software or a tax return spreadsheet such as http://www.peeltech.ca/mytax.shtml


Cheers


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## leeder (Jan 28, 2012)

Thanks, Eclectic. Your breakdown is very helpful for me, especially because I'm trying to build my own spreadsheet to track the ACB. I couldn't get my head around the calculation.

Couple follow up questions -- does it matter whether a part of the distribution is foreign income that is comprised of capital gain and interest income? Do I have to track those? Or, for tax purposes, do I just fill out whatever the T3 indicates? Also, how would the above calculation change if there was an additional amount that was reinvested by the ETF?


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## AltaRed (Jun 8, 2009)

All foreign income is Other Income - no differentiation between types of income.


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## Eclectic12 (Oct 20, 2010)

leeder said:


> Thanks, Eclectic. Your breakdown is very helpful for me, especially because I'm trying to build my own spreadsheet to track the ACB. I couldn't get my head around the calculation.


No problem ... just bear in mind to do your due diligence by reading the links because I'm working from my Canadian ETF knowledge so any US only wrinkles won't be auto-magically included in the numbers I personally have.


Cheers


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## Eclectic12 (Oct 20, 2010)

leeder said:


> Couple follow up questions -- does it matter whether a part of the distribution is foreign income that is comprised of capital gain and interest income? Do I have to track those?
> 
> Or, for tax purposes, do I just fill out whatever the T3 indicates?


Yes the breakdown matters and you will have to track some parts but not everything.

The key here is that if Vanguard has reported $0.13814 per unit in Foreign income. It is all either income or interest - there's no mixing of foreign capital gain and income.

The RoC *is* capital gain (cg) which is likely mostly foreign cg, that is not reported on the T3 form and is reported separately in the distribution info.

While the ACB is positive, the RoC is subtracted from the ACB. This means that the cg taxes will be deferred until the units are sold instead of when cash was received.

If the ACB falls to zero or a negative number, then going forward - the RoC portion of the payment is reported as a cg *in that tax year*, until another transaction such as buying more units make the ACB positive again. Examples of transactions that could make the ACB positive again include the synthetic DRIP or putting fresh money into new units, both of which are buying new units.

http://howtoinvestonline.blogspot.ca/2010/07/return-of-capital-separating-good-from.html

For tax purposes, you have to track the ACB yourself, which includes any transactions that affect the ACB, through whatever bookkeeping you have setup. As I've experienced, trying to figure out the correct ACB, years after the fact where companies where bought out and the distribution info is difficult to get is a major pain. So a bit of effort every six months or once a year (as well as PDF backups of the info plus electronic backups) are well worth the effort, IMO.

So far, you already have two transactions that affect the ACB - the RoC portion of the cash payment and the synthetic DRIP that has automatically purchased new shares.


For you tax return - most of the time it will be to report what's on the T3. As mentioned above, the RoC could result in having to additionally report a small amount of cg but as I understand it, that's the only potential additional tax that won't be on the T3 form.




leeder said:


> Also, how would the above calculation change if there was an additional amount that was reinvested by the ETF?


It would add another transaction that is similar to the synthetic DRIP.

The differences are that with the DRIP, there are additional units bought at a set price. For the reinvested distribution of an ETF, there are no additional units and no set price but the ACB has increased by the amount reported in the "Reinvested distribution per unit" column.

Where this additional transaction is not done - the ACB will be artificially low so that more cg taxes will be assessed when the units are sold than should have been. So there is incentive to make sure this is right.

The link below has a chart where it illustrates this by comparing how a MF will take care of this versus the ETF.
http://howtoinvestonline.blogspot.ca/2009/01/etfs-and-mutual-funds-calculating.html


As always, read up on it and do your due diligence as I have been known to make mistakes or misunderstand from time to time. :biggrin:


Cheers


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## Eclectic12 (Oct 20, 2010)

AltaRed said:


> All foreign income is Other Income - no differentiation between types of income.


I think you mean that if the distribution info says it's foreign income - there's no capital gains mixed in.

There are certainly different types of income (with different tax implications) being reported as the RoC is really a capital gain. It may or may not be deferred until the units are sold, depending on the current ACB value.


Cheers


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