# Tax bookkeeping-ETF vs Mutual funds



## Belguy (May 24, 2010)

What exactly are the differences, if any, of the tax bookkeeping required between a non-registered portfolio of mutual funds and one comprised of only ETF's?


----------



## Eclectic12 (Oct 20, 2010)

From what others have posted (I have never held MFs in a taxable account), the MF company does the bulk of the bookkeeping for one. This seems to mean the T forms take care of the yearly stuff, without a need to make adjustments to the ACB.

The formula for MFs is simple.
http://www.taxtips.ca/personaltax/investing/taxtreatment/mutualfunds.htm


ETFs on the other hand, usually have RoC, which one has to track on one's own. It is improving as some brokers are correctly adjusting the ACB they publish monthly but other brokers are not.

Looking at the ETF formula, there are more factors.
http://www.taxtips.ca/personaltax/investing/taxtreatment/etfs.htm


I have posted a couple of times an article that highlights what the MF company will do that an ETF investor has to manage themselves. It had a spreadsheet showing how missing the bookkeeping could result in paying double the taxes one should with the ETF.

When I find it again, I'll post the link.


That said ... where one take the time to understand what is required then modify one's bookkeeping system plus do yearly updates, for most people what is initially daunting becomes more of a tedious task that takes a relatively small amount of time (similar to taking the time to reconcile one's CC statement or cheque book).


Cheers


*PS*

Or there is also http://www.adjustedcostbase.ca/

Their blog section has some interesting articles.
http://www.adjustedcostbase.ca/blog/phantom-distributions-and-their-effect-on-adjusted-cost-base/
http://www.adjustedcostbase.ca/blog...e-for-etfs-and-trusts-from-cdsinnovations-ca/


----------



## Belguy (May 24, 2010)

Thank you for all of the interesting and useful links, Eclectic.

This entire bookkeeping chore for taxes has me intimidated. Is keeping track of the adjusted cost base etc. for stocks and ETF's something that most small investors manage to do themselves or do many rely on the services of a tax professional? 

I would like to be able to choose between purchasing either mutual funds or ETF's for my non registered investment account but the calculations needed to maintain a portfolio of ETF's just seems onerous to me. That leads me to believe that it would be much easier (although more costly) just to invest in mutual funds.

I am surprised that this does not seem to be much of an issue with other small investors--especially with older investors like me.

I may just purchase the Mawer MAW 105 fund instead of a couch potato portfolio of ETF'S and be done with it.

Does this seem reasonable?


----------



## Eclectic12 (Oct 20, 2010)

Belguy said:


> ... This entire bookkeeping chore for taxes has me intimidated.
> 
> Is keeping track of the adjusted cost base etc. for stocks and ETF's something that most small investors manage to do themselves or do many rely on the services of a tax professional?


With the spreadsheets and software available plus being semi-computer comfortable - IMO it is not huge. The trouble is that CMF is biased to DIY types so likely there's a higher number here who are willing to ... well, DIY.

Several who DIY have posted that once their spreadsheet was modified (or one that the individual was happy with was downloaded) posted what matches my experience ... less than an hour a year when the info becomes available.

Now I suspect that if one had a multi-million dollar portfolio, it might get worse but then again, that type of person likely is already hiring other professionals.




Belguy said:


> ... I would like to be able to choose between purchasing either mutual funds or ETF's for my non registered investment account but the calculations needed to maintain a portfolio of ETF's just seems onerous to me. That leads me to believe that it would be much easier (although more costly) just to invest in mutual funds.


YMMV ... assuming my understanding of the MFs in a taxable account where the MF company takes care of the calcs for the investor is correct - using something like the TD eSeries might be the ticket without as much of a jump in cost.

How many ETFs or REITs are you thinking of?
I'd have to check ... but I believe I was around seven or so where I'm sure the yearly effort was thirty or forty minutes. It is probably a lot less but I haven't timed it and I want to illustrate that a conservative estimate still doesn't end up being a huge amount of time.




Belguy said:


> ... I am surprised that this does not seem to be much of an issue with other small investors--especially with older investors like me.


The posts on CMF seem to be mostly from novices or people who jumped on the ETF bandwagon without investigating bookkeeping/tax implications. Note that I did similar by assuming a REIT was the same as an eligible dividend paying stock. The fallout with it's painful process now has me checking tax implications before buying.

The responses from the experienced (not necessarily older types) is usually "learn it where when it is understood, it is nowhere near as bad as it looks". A few say they don't want to deal with it so they use registered accounts for these types of investments. I personally don't like the idea of skipping learning about it as RRSP's aren't forever so one will either have to give up on the ETF or deal with it anyway at some point. Some of the younger investors might be able to keep their ETF/REIT content in their TFSA but I doubt it works for everyone.

Now that I understand it ... it seems to me to be in the same ball park as gathering up all my tax receipts to hand over to a tax place like H&R block.

Where one does their bookkeeping and taxes on a computer anyway - it doesn't seem that hard to add a few transactions to the work that is already being done.


Cheers


----------



## AltaRed (Jun 8, 2009)

Mutual funds can have the same variety of income distributions that ETFs do, including ROC, but to my knowledge, not phantom re-invested distributions which may be unique to ETFs. Phantom re-invested distributions result in an addition to ACB and that info is usually only available off the ETF's specific website. That is one area that novices are most likely to miss (to their ultimate disadvantage when they eventually sell the ETF, i.e. paying more CG tax than they otherwise would).

P.S. The one other difference with mutual funds is it is possible the MF company will give you your Book Value / Cost Basis each year as part of its investor information. I haven't owned mutual funds for years so I cannot attest to that any more.


----------



## Belguy (May 24, 2010)

For those who own Mawer, or any other mutual funds, in their non registered accounts, do you find the need to perform any tax calculations or track any data or do you simply report the information provided to you on the related T3's when filing your income tax return?


----------



## AltaRed (Jun 8, 2009)

The T3 tax slips have that information.... whether mutual funds or ETFs. The one thing every investor must track on their own in taxable accounts is the ACB for when one sells any shares/units.


----------



## Belguy (May 24, 2010)

Do you think that it is safe to say that virtually all investors, who hold ETF's in non registered accounts, track and report the adjusted cost base whenever they sell any units?

I would argue that many of them have absolutely no idea of what the term 'adjusted cost base' even means!!

If I sold some units last year, and haven't kept track of the adjusted cost base, what do I do now?

Incidentally, I am in my 70's and not very computer literate and wouldn't know how to set up and operate a spreadsheet if my life depended upon it.

Would any tax preparing company be able to handle this for me if I could provide them with the buying and selling dates and amounts?


----------



## AltaRed (Jun 8, 2009)

I have no idea how many get the ACB right for either mutual funds or ETFs, but more likely get it wrong with ETFs due to the phantom reinvested distributions (where applicable). Not that many ETFs will have those phantom re-invested distributions.

If you haven't kept track of ACB, the amount of error you have depends on how much ROC your particular ETF has had over time and how much re-invested distributions. If you tell us, we can give you an idea. If there is very little discrepancy you can either forget about it or file a T1-ADJ for that tax year.

You don't need a spreadsheet to keep track of ACB if you only have a few assets to deal with. Do it with a hand ledger or even a Word document and use a calculator. A tax company cannot handle this for you without you providing them with all the buy, sell, re-invested distributions data. Tax slips are not good enough IF there are phantom re-invested distributions.


----------



## Robillard (Apr 11, 2009)

If you need the ACB figures, for either a fund or ETF, you can try calling your discount broker or the fund company itself (depending on how you hold the investment) to try and get the information. AltaRed mentioned "phantom reinvested distributions." I've seen these before, and from what I have seen they may be accounted for as an increase in the book value of your holdings. These can exist for both mutual funds and ETFs. I'm not sure of the effect for current taxation, but since they increase the book value, you realise a smaller capital gain on disposal, which triggers a smaller tax liability in the future.


----------



## Eclectic12 (Oct 20, 2010)

Belguy said:


> Do you think that it is safe to say that virtually all investors, who hold ETF's in non registered accounts, track and report the adjusted cost base whenever they sell any units?


The number of posts on CMF where people are surprised to learn they *have* to track things like RoC and phantom distributions for ETFs tells me that only those who have investigated the bookkeeping/tax requirements are likely doing so.

It is clearly not "virtually all investors, who hold ETF's".

It isn't even for all investments. I made the mistake decades ago of assuming the tax treatment of REITs was the same as an eligible dividend paying Canadian stock ... to my chagrin when I sold. :stupid:




Belguy said:


> I would argue that many of them have absolutely no idea of what the term 'adjusted cost base' even means!!


I seem to recall the ones posting here for ETFs mostly knew what ACB was ... the RoC and phantom distributions were the issue. 
Some assumed it was the broker's responsibility to track ACB ... including some who thought this for all capital investments held at a broker.


Regardless of what the investor "thinks" ... it does not take long to review any of the many souces (ex. book on investing, web site on taxes, CRA's web site) to come across pretty clear info that in a taxable account, regardless of the investment - ACB is part of the taxes where it is the investor's responsibility to get it right.

Just like a tax return, one can outsource it or depend on other info but where it is wrong, the investor pays the price. 




Belguy said:


> If I sold some units last year, and haven't kept track of the adjusted cost base, what do I do now?


Was this in a taxable account?

If so, what sorts of records do you have?
Is the investment company around so that you can get the required info from them or from their web site?




Belguy said:


> Incidentally, I am in my 70's and not very computer literate and wouldn't know how to set up and operate a spreadsheet if my life depended upon it.


Can you do multiplication, addition and subtraction?
If so, then the main challenge is to get the numbers then understand what is applied to what.

If your broker supplies a "book value" as part the monthly listing ... you could use that as your cost base and hope you aren't over or under paying the capital gains tax.




Belguy said:


> Would any tax preparing company be able to handle this for me if I could provide them with the buying and selling dates and amounts?


A tax preparer or bookkeeping will be able to do this, for a fee.

It strikes me as being the same as taking a relatively simple tax return to a preparer. Most of the work is in having the slips/receipts.


Cheers


----------



## Eclectic12 (Oct 20, 2010)

Robillard said:


> .. I've seen these before, and from what I have seen they may be accounted for as an increase in the book value of your holdings. These can exist for both mutual funds and ETFs.
> 
> I'm not sure of the effect for current taxation, but since they increase the book value, you realise a smaller capital gain on disposal, which triggers a smaller tax liability in the future.


My understanding is that the phantom distribution tax implication in the current tax year is typically a minimum capital gains amount equal to the phantom distribution. It can be higher as there may be CG from operations as well. So if the usual CG from operations is say $0.60 per unit, a phantom distribution of $1.20 means that for that tax year, one has $1.80 per unit CG to pay tax on.

One of the commenters on one of the www.adjustedcostbase.ca articles on phantom distributions says that at times, there has been phantom distributions that were interest or RoC instead of CG. This seems vendor specific but I haven't checked.
http://www.adjustedcostbase.ca/blog/phantom-distributions-and-their-effect-on-adjusted-cost-base/


Cheers


----------



## james4beach (Nov 15, 2012)

Regarding tracking the ETF's ROC and reinvested distributions ... most of us struggle with this. It's not pleasant, and it's not easy. It's a good reason to put ETFs inside tax shelters (TFSA & RRSP).

One shortcut is that the major brokerages track the ACB, it's just not clear whether you can rely on this alone. My experience with TDDI has been that the cost basis they track for an ETF holding is correctly adjusted for ROC and reinvested distributions.

Which is great, because they appear to be doing the work. This topic has come up a few times on this forum and I think many people verify their broker's calculation to make sure it's right.


----------



## james4beach (Nov 15, 2012)

AltaRed said:


> The T3 tax slips have that information.... whether mutual funds or ETFs. The one thing every investor must track on their own in taxable accounts is the ACB for when one sells any shares/units.


Beware. The T3 slips don't include the reinvested distributions.
http://www.theglobeandmail.com/glob...n-with-phantom-distributions/article18409698/

You have to hunt down this information yourself. This is the document you need, posted by iShares and other ETF providers every year
https://www.blackrock.com/ca/indivi...e/2014-final-distribution-breakdown-en-ca.pdf


----------



## james4beach (Nov 15, 2012)

A lot of ETFs have reinvested distributions, it's not too rare. In 2014 (which is the last tax distribution characteristics document) at iShares, there are year end reinvested distributions for these major funds: XDV, XEI, XFN, XIC, XRB

Using that iShares tax document, remember to track and modify the ACB over time by doing:

+ add "Reinvested Distribution Per Unit"
- subtract "Return of Capital"


----------



## Eclectic12 (Oct 20, 2010)

james4beach said:


> Regarding tracking the ETF's ROC and reinvested distributions ... most of us struggle with this. It's not pleasant, and it's not easy.


I agree it is tedious and for phantom distributions, I have yet to confirm an easy way.

However, most of mine haven't had the phantom distribution so once I understood it, I haven't seen ACB - RoC amount + reinvested amount as all that difficult. Even the amount parts are relatively simple. For example, RoC amount = units held x # while my DRIPs are "# of units before + unit(s) bought" and "ACB before + ACB of unit(s) bought".

This is all addition, subtraction and multiplication here ... none of the fancier math.




james4beach said:


> It's a good reason to put ETFs inside tax shelters (TFSA & RRSP).


For those that don't want to pay someone or do the math themselves ... yes. Though for some of us old timers, there may not be enough TFSA room, as the RRSP switches to a RRIF, less and less can be held completely calculation free.

So IMO, it is better to learn about it and be prepared ... (but then again, I was a boy scout ).




james4beach said:


> One shortcut is that the major brokerages track the ACB, it's just not clear whether you can rely on this alone. My experience with TDDI has been that the cost basis they track for an ETF holding is correctly adjusted for ROC and reinvested distributions.
> 
> Which is great, because they appear to be doing the work. This topic has come up a few times on this forum and I think many people verify their broker's calculation to make sure it's right.


 ... and several, including a G&M columnist has indicated their brokers numbers are wrong. Many moons ago, TD Waterhouse was wrong for a stock bought/sold under their watch.

Probably spot checking would give confidence and if it keeps coming up correctly, one can sleep better. I'd pick a few that had phantom distributions to increase the confidence. At the end of the day, it is caveat emptor as only the investor cares for their money as well as ensuring the taxes paid are correct the most.


Cheers


----------



## Eclectic12 (Oct 20, 2010)

james4beach said:


> A lot of ETFs have reinvested distributions, it's not too rare.


Yes ... that is why I've been focusing more on them.



> The number of phantom distributions made by ETFs is increasing, in line with the increase in the number of ETFs now outstanding. From their inception through 2014, *Canadian ETFs have made over 400 phantom distributions*, ranging anywhere from a few cents to several dollars per unit.


http://www.fundlibrary.com/features/etfs/page.asp?id=15488


If one can all it that ... the "good news" is that CRA won't be an issue as the net effect of missing it is to pay more taxes than one should.

Cheers


----------



## AltaRed (Jun 8, 2009)

james4beach said:


> Beware. The T3 slips don't include the reinvested distributions.
> http://www.theglobeandmail.com/glob...n-with-phantom-distributions/article18409698/
> 
> You have to hunt down this information yourself. This is the document you need, posted by iShares and other ETF providers every year
> https://www.blackrock.com/ca/indivi...e/2014-final-distribution-breakdown-en-ca.pdf


Yes, as do I for the phantom re-invested distributions.


----------

