Last week's column, which discussed how ETF distributions affect the calculation of capital gains and losses, prompted a bunch of questions from readers. (Read the column here)
Today, I'll answer some of them.
Do I still pay tax on reinvested or "phantom" ETF distributions even though I receive no cash?
Yes. Reinvested distributions are typically announced at year end and usually reflect capital gains realized by the fund during the year. Your share of these capital gains is reported on your T3 and is taxable – even if you did not receive any cash.
Most funds actually reinvest capital gains throughout the year, and a year-end reinvested distribution is really just a way to account for those capital gains that were already reinvested in the fund.
Why does a reinvested distribution raise my adjusted cost base?
Even though you don't receive a reinvested distribution in cash, you are in effect receiving income (on which you are taxed) and then plowing that money back into the fund.
It's similar to what happens with a dividend reinvestment plan – the reinvested dividend is effectively treated as new money and therefore results in an increase in your adjusted cost base.
If you fail to raise your ACB, you could end up reporting a higher capital gain and paying more tax than necessary when you sell your units.
For more on reinvested distributions, see my columns online at here.
I hold three iShares exchange-traded funds: XIN, XIU and XMD. Your article indicated that we can go to the specific Web page for each ETF to find detailed information on historical distributions. How do I find these Web pages?
The easiest way is to go to the BlackRock Canada website and enter the ETF's ticker symbol in the search box at the top right of the page. Then click on the magnifying glass symbol. That will take you to the Web page for the ETF in question.
Distribution characteristics for all iShares ETFs can also be found under "resources" and "tax information centre" on the BlackRock Canada site, but the data only go back a few years.
Other ETF providers also post this information on their sites, usually some time in February for the previous calendar year.
Another source of historical distributions is CDS Innovations, which provides distribution data for Canadian ETFs, mutual funds and limited partnerships on its website.
When an ETF reinvests a distribution, do I receive additional units?
With mutual funds, you do receive additional units. However, the net asset value (NAV) of the fund immediately drops to reflect this, so the value of your holdings does not change. With ETFs, the process is slightly different. As iShares explains on its website, a reinvested distribution results in additional units – but only temporarily: "Immediately following a reinvested distribution, the number of units outstanding is consolidated so that the number of units held by investors is the same as before the capital gains distribution. For iShares funds, unitholders will not see an increase in the number of units held, and will NOT see a change in the NAV per unit."
The end result for mutual fund and ETF holders is the same: The total value of your investment is not affected by a reinvested distribution.
Say I purchase 100 shares of ABC Corp. at $50 each in 2006, then in 2013, ABC Corp. issues me 100 additional shares in a two-for-one stock split. If I sell 80 shares at $100 in 2016, in calculating the capital gain can I use $50 as the purchase price or must I use $25?
Your cost for the initial shares was $5,000 or $50 a share. After the split, your total cost is still $5,000 but your cost per share drops to $25 (because you now have twice as many shares).
If you then sell 80 shares, your cost on those shares is $2,000 (80 times $25) and your sale proceeds are $8,000 (80 times $100). Your capital gain is therefore $6,000 ($8,000 minus $2,000), less any trading commissions on the purchase and sale.
Note: For the 120 shares you still own, your cost per share remains $25.