My calculation for the adjusted cost base of an ETF was lower than the number on my T5008. My records reflect the amounts reported on T3 slips in prior years, while the broker does not seem to include all these amounts. The brokerage told me to rely on my own calculations. Is this a common issue and will the CRA accept a taxpayer’s ACB calculations?
Ah, the T5008. Why must it turn my column into a house of lies?
In the few short months since I’ve taken over the Investor Clinic, no single topic has shown up more frequently in my inbox than troubles with these slips. That’s surely in part because it’s tax season (a friendly reminder that the deadline for filing and paying any balance owed is April 30), but it also reflects how frequently problems pop up.
While many people rely on T5008 statements of securities transactions for filling out Schedule 3 forms of capital gains or losses, there are a number of reasons why these may not correctly record the ACB, said Ryan Minor, director of tax at CPA Canada.
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Two of the more common ones are transferring holdings from one brokerage to another and holding the same security in non-registered accounts in two (or more) different brokerages. In the latter case, each brokerage’s ACB estimate may not be worth the paper it’s printed on, as neither one is aware of your cost base in the other.
The death of a spouse may also lead to errors if you elect out of the automatic spousal rollover that would usually see shares transferred at the deceased’s ACB. Choosing not to use the rollover on shares that have appreciated (which may make sense for tax reasons) means transferring those shares at fair market value.
That will raise your ACB, but your brokerage “would not necessarily know that you bumped up the cost base,” Mr. Minor said.
CIBC Investors Edge has put out a helpful and comprehensive document of frequently asked questions about the T5008, which you can find online. It lists a number of other situations, including trading options, short sales, and holding both Canadian Depositary Receipts and shares of the same class of the underlying issuer, that are likely to lead to inaccurate ACB recording.
For investors who don’t mind the fees, Mr. Minor said high-end, full-service wealth managers may provide better reporting than self-directed brokerages.
In the end, though, it’s up to you to make sure all your income is reported accurately. Your brokerage is correct that you should use your own calculations. If, as your question suggests, you keep careful records of your T3 slips and ACB calculations, you should be in good shape.
Are the distributions from the iShares S&P/TSX Composite High Dividend Index ETF (XEI), or any similar Canadian “pure-play” dividend ETF, fully eligible for the dividend tax credit?
As devoted as I am to readers, I will admit I haven’t gone through the historical distributions of every Canadian dividend ETF to determine the proportion paid out by each as eligible dividends. I have looked at enough to be confident that the practical answer is no, but I invite friendly corrections.
In any case, if you’re a dividend fundamentalist, XEI isn’t the place to be. While its distributions skew toward eligible dividends, there are also years where most distributions come from other sources. In 2022, eligible dividends comprised less than 40 per cent of distributions, compared with nearly 90 per cent a year earlier.
There are ETFs that come closer to your ideal. Since 2012, the Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY) has paid out its distributions entirely as eligible dividends twice, and has breached 90 per cent a handful more times. But its distributions are still not always fully eligible.
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The issue, said Ken Chen, portfolio manager at Global X Canada, is that an ETF only generating eligible dividends would have to avoid selling holdings at a gain over time. That’s almost impossible in the long term because of corporate actions, cash management and the need to rebalance, he said.
He also had a question for you: Why is 100 per cent eligible dividends from an ETF your target?
The tax credit means you’re taxed less on eligible dividends than on interest income, with the top marginal tax rate for eligible dividends in Ontario of around 39 per cent, he said. But given the 50-per-cent capital gains inclusion rate, even those in Ontario’s top marginal tax bracket of 53 per cent are still only taxed at a lower rate of 26.5 per cent on capital gains income.
E-mail your questions to agalbraith@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.