# Questrade not properly dealing with Return of Capital?



## kreyszig (Jan 16, 2013)

I have a taxable account with Questrade where I have VNQ shares and it looks like they regroup dividends and return of capital as "dividends" on which they retain 15% withholding taxes, instead of retaining 15% taxes only on the part of the distribution that excludes RoC. Are there other people that are experiencing this issue with Questrade?

Thanks!


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## Eclectic12 (Oct 20, 2010)

This tax tips article says:



> Distributions made by foreign shares to Canadian shareholders are usually considered foreign dividends, 100% taxable.
> 
> When distributions from US shares are categorized as capital gains or return of capital for US taxpayers, they will still be considered fully taxable to Canadian taxpayers. See the 2012 Tax Court Case Schmidt v. The Queen. This would also apply to foreign mutual funds or exchange traded funds.


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


However ... I seem to recall others posting that their tax forms were reporting US dividends without including RoC.


Also - it is my understanding that the US clearing house slices off the 15% withholding taxes that are forwarded to the IRS long before Questrade (or other brokers) receive any payments. So if the clearing house figures it's both - you can talk to Questrade all you want but it won't change what is happening.



Cheers


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## kreyszig (Jan 16, 2013)

I had read the article on taxtips but it is not well substanciated (I had also read the court case, but lack of proof rather than foreign RoC seems to be the issue). I contacted CRA two days ago and they confirmed to me that there is no difference in the treatment of foreign vs Canadian RoC on their side. It makes sense since RoC should be simply a chunk of invested capital that is returned to the investor?

So if the problem is with the US clearing house, it means that they are the ones that should fix the broken mechanism, right?


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## Eclectic12 (Oct 20, 2010)

That's my understanding ... maybe someone with more hands on experience with how the IRS gets it's slice of payments can comment.

As for lack of proof of RoC in the court case - that seems pretty wacky. 

If the MF company is reporting RoC and units are held, then RoC flowed through. That's certainly the way it works for Canadian MFs, trusts and ETFs so I'm not sure why the tax court would decide it works differently for a US MF.

Now if the tax court objected that the US defines RoC differently than Canada - I could buy that. 


Cheers


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## kreyszig (Jan 16, 2013)

Eclectic12 said:


> That's my understanding ... maybe someone with more hands on experience with how the IRS gets it's slice of payments can comment.
> 
> As for lack of proof of RoC in the court case - that seems pretty wacky.
> 
> ...


Yes I agree, and according to the court case, it does not seem that the eligibility of the US RoC was at stakes:

"[2] It is the Appellant’s position that the investment income consists of income, taxable capital gains and a return of capital."

...

"[7] The Appellant searched the internet and found that DNP had not only distributed investment income in 2009 but had also distributed Long-Term Capital Gains in January 2009 and a Return of Capital in February to December 2009. Prior to filing his income tax return, the Appellant wrote to RBC Dominion to request a corrected T5 or a Form 1099-Div which included the capital gains and return of capital. He did not receive a response.

[8] Using the distributions per share which were reported by DNP on the internet, the Appellant and his spouse reported only $12,854.93 of the investment income with the Appellant reporting $8,226.94 (64%) of the income and his spouse reporting $4,627.99 (36%).

[9] The Appellant calculated that $6,948.67 of the investment income was a return of capital and neither he nor his spouse reported it. He also calculated that $734.13 of the investment income was a capital gain and this amount was reported by him and his spouse in the ratio 64/36.

[10] I cannot agree with the Appellant’s position. He has not presented any evidence that would allow me to conclude that the type of distributions made by DNP flowed through to him. None of the amounts received by the Appellant resulted from the sale of any of his units in DNP."


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## andrewf (Mar 1, 2010)

I think this is standard industry practice. Perhaps it is possibly to claim back the RoC from the IRS. I just avoid holding US securities that pay significant RoC in an account subject to withholding taxes.


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## kreyszig (Jan 16, 2013)

andrewf said:


> I think this is standard industry practice. Perhaps it is possibly to claim back the RoC from the IRS. I just avoid holding US securities that pay significant RoC in an account subject to withholding taxes.


Thanks Andrew. Do you know why it is standard Industry Practice? Is it because it is technically difficult for the broker to properly retain withholding taxes for such securities due to the way RoC information is released?


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## andrewf (Mar 1, 2010)

I don't think the broker knows at the time of the cash flow what the tax treatment of the distribution is.


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## kreyszig (Jan 16, 2013)

andrewf said:


> I don't think the broker knows at the time of the cash flow what the tax treatment of the distribution is.


Ok yes this is what I thought. It should be something that they fix at the end of the year though. They had retained 30% withholding taxes (instead of 15%) by mistake for one dividend payment of some of my securities and they automatically issued a refund before the end of the year. They could do the same for RoCs... If not I could always claim the amount from IRS. But even if a withholding tax refund was not possible from Questrade, they must nonetheless make sure that tax slips are filled properly and that the reported amount of dividends does not include RoC. They might already do this part right, I am not sure (I am not there yet since I have only written code to perform my ACB and capital gains/losses calculations so far)

The last time I chatted with a Questrade agent, he told me that the issue was escalated and I would get an update at some point next week. He agreed that withholding tax should not be retained for RoC.


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## kreyszig (Jan 16, 2013)

So I got a reply from my broker. I was told that I would get a refund for the withholding tax that was charged on RoC and that I would also get an amended tax slip. So for those who have RoC from foreign securities, it seems that this is possible to have it properly processed by your broker...


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## andrewf (Mar 1, 2010)

And CRA does not consider it to be taxable 'foreign income'? Does this mean that capital gains distributions on US securities can also be characterized as capital gains for income tax purposes?


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## kreyszig (Jan 16, 2013)

andrewf said:


> And CRA does not consider it to be taxable 'foreign income'? Does this mean that capital gains distributions on US securities can also be characterized as capital gains for income tax purposes?


As I mentioned in an earlier post, a CRA agent confirmed to me that foreign RoC is treated the same way as RoC from Canadian securities. About capital gain distributions, since they are reinvested by the fund and you don't get any cash, I would assume they would simply increase your ACB as for Canadian securities (http://www.pwlcapital.com/pwl/media...Bender_As-Easy-as-ACB_2013-April.pdf?ext=.pdf ). I have not asked that question to CRA in particular though...


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## andrewf (Mar 1, 2010)

CG distributions are cash distributions of taxable capital gains. This is not the same as a reinvested distribution.


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## kreyszig (Jan 16, 2013)

andrewf said:


> CG distributions are cash distributions of taxable capital gains. This is not the same as a reinvested distribution.


About RoC, note that they are not considered directly as "capital gain", they are subtracted from the ACB (just to make things clear). It can eventually translate into capital gain when the shares are sold...

About capital gain distributions, that paper I linked define them as being reinvested... I understand what you mean I think, but I have never had to deal with those, so I don't know. It would make sense if they translated into immediate capital gains (i.e. no withholding taxes, but 50% of the marginal tax rate on Canadian side)...


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## warp (Sep 4, 2010)

andrewf said:


> And CRA does not consider it to be taxable 'foreign income'? Does this mean that capital gains distributions on US securities can also be characterized as capital gains for income tax purposes?


In my personaal experience, US capital gains were considered regular foreign income..fully taxable and shown on my T5. I screamed and yelled about this, to no avail.


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## AltaRed (Jun 8, 2009)

warp said:


> In my personaal experience, US capital gains were considered regular foreign income..fully taxable and shown on my T5. I screamed and yelled about this, to no avail.


Distributions (from say ETFs) that include capital gains are all taxed as foreign non-business income. But the sale of the stock/asset does attract capital gains (or losses) as the case may be.


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## humble_pie (Jun 7, 2009)

AltaRed said:


> Distributions (from say ETFs) that include capital gains are all taxed as foreign non-business income.


now *that* would be enough to keep me away from US ETFs forever & ever.

one of the negative things about any kind of fund or ETF is that investor loses control of the taxation consequences. Whereas owning foreign stocks themselves - either in registered accounts or in outright ownership - does mean a considerable degree of surveillance & tax management ...

ok there are other advantages to not going in for US ETFs hell-for-leather :biggrin:


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## andrewf (Mar 1, 2010)

There's absolutely no problem holding US ETFs in an RRSP.


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## warp (Sep 4, 2010)

Should of made it more clear.........

Any distributions you receive from a US ETF will be considered "foreign income" for Canadian tax purposes, and be treated as regular income, like interest.
This includes capital gains DISTRIBUTIONS, dividends, or interest.

If you sell the ETF at a profit, you will have capital gains, and it will be treated the same as any capital gain you have in Canada.


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