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investor clinic

My broker provides the “average cost” for stocks and exchange-traded funds I own. How reliable are these numbers? Can I use them when I calculate capital gains?

In my experience, brokers usually get these numbers right, especially when the holdings are straightforward. In more complex situations, however, mistakes do happen. Brokers don’t want to be on the hook for any errors, which is why they typically publish a disclaimer stating that the average cost – also known as “book value” or “cost basis” – is for information purposes only and that calculating the average cost for capital gains tax purposes is the responsibility of the client.

There are several reasons that your broker’s numbers could be incorrect. For example, if you own real estate investment trusts or exchange-traded funds, your broker might not account for return of capital (which reduces your adjusted cost base) or “phantom” non-cash distributions (which increase your ACB).

Problems can also arise if shares of a stock you own are held at multiple brokers. For tax purposes, your average cost is supposed to reflect shares held in all non-registered accounts, but your broker has no way of knowing the cost of shares held at different institutions.

Similarly, transactions by a spouse can also make it problematic to rely on your broker’s ACB. If you sell a stock for what appears to be a capital loss based on your broker’s average cost, but your spouse then purchases the same stock within 30 days, the capital loss becomes a “superficial loss” that is not allowed for tax purposes.

What’s more, mergers, spinoffs and other corporate transactions can lead to mistakes in brokers’ ACB calculations, many readers have told me.

“Relying on your brokerage’s potentially erroneous ACB figures can be problematic, no matter which direction the error occurs,” says a blog post on adjustedcostbase.ca, a website that helps investors track their ACB.

“If the reported ACB value is too low (resulting in a higher capital gain) you’ll end up paying more tax than necessary. If the ACB is too high (resulting in a lower capital gain) you’ll risk getting chased by the CRA. It’s therefore strongly advisable to calculate these values on your own to ensure correctness.”

Where to start? Well, proper record keeping is a must. Because online transaction histories provided by brokers only go back so far, I recommend printing out and filing all trading slips. Brokers can dig up older records, but they may charge a fee.

If you hold securities that distribute return of capital, be sure to hang on to your year-end T3 statements that show the ROC paid by each security. To determine whether any of your ETFs had a reinvested distribution, check the ETF company’s website.

Keeping a spreadsheet can also minimize last-minute tax headaches. Services such as adjustedcostbase.ca and acbtracking.ca can also help.

Finally – and this is something I do myself – consider holding securities with complex tax reporting in a registered account to eliminate the need to track the ACB altogether.

I used to own Brookfield Infrastructure Partners LP (BIP.UN) in my non-registered account but switched to Brookfield Infrastructure Corp. (BIPC) for its simpler tax reporting. I understood that the share prices wouldn’t necessarily move in lockstep, but the performance difference has been huge. BIP.UN just hit a new 52-week high but BIPC has dropped more than 25 per cent from its high last summer. What is going on here?

Funny, not long ago I was hearing from BIP.UN investors who were frustrated that their units were badly trailing BIPC. Now, it’s the reverse. My guess is that some BIP.UN investors switched into BIPC just as the latter ran out of steam.

BIPC’s pullback may be due to a couple of factors. First, after Brookfield Infrastructure Partners LP created BIPC in March, 2020, the new shares zoomed ahead, posting a total return of more than 100 per cent at their peak in July, 2021. The gains were likely driven, in part, by demand from institutional investors who could not invest in limited partnership units but had no such restrictions on shares of dividend-paying corporations such as BIPC.

Over the same period, however, BIP.UN posted a total return of just 42 per cent. BIPC’s strong relative outperformance stretched its valuation and made it vulnerable to a pullback.

A second factor may have been Brookfield Infrastructure Partners LP’s recent acquisition of Inter Pipeline Ltd., in which IPL shareholders could elect to receive part of the purchase price in the equivalent of BIPC shares. The prospect that some IPL investors would sell their newly acquired BIPC shares may have put pressure on the price.

Now, things have more or less come full circle. At one point in 2020, BIPC’s share price traded at a premium of more than $30 over BIP.UN. When I last checked on Friday afternoon, however, the gap had narrowed to about $2. Where the spread will go from here is anyone’s guess, but here’s an idea: Split your money between the two classes of shares and stop worrying about which will outperform.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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