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For years, I have calculated the adjusted cost base (ACB) and capital gains of my stocks myself and reported the data to the Canada Revenue Agency. Recently, however, I started using the CRA’s “auto-fill my return” service to download tax slips to my tax software. While filing my 2022 return, I noticed that the ACB I calculated manually for one of my exchange-traded funds – the iShares S&P/TSX SmallCap Index ETF (XCS) – differed substantially from the ACB on the T5008 slip issued by my broker. Specifically, in 2021 I purchased 200 units of XCS for $4,013.95, which I sold in 2022 for net proceeds of $3,997.05. However, the T5008 for 2022 shows the “cost or Book Value” as $4890.83. Surely, my broker can’t be wrong. What am I missing?

Yes, your broker can be wrong. It happens more often than you might think.

The other day, for example, I was helping my mother review her portfolio and noticed that the ACB of her Canadian Imperial Bank of Commerce CMT shares was twice as high as it should have been. After staring at the screen in confusion for 10 minutes, I realized the problem: When CIBC split its shares two-for-one in May, 2022, my mother’s discount broker not only doubled the number of shares she owns (which was correct) but also doubled the total cost of her shares (which was not correct, as the total price she paid for her shares had not changed). The online portfolio statement made it look like my mom had an unrealized loss on her CIBC shares, when in fact she had a gain.

Something similar seems to have happened in your case. However, it’s a little more complicated as it involved a year-end reinvested – or “phantom” – distribution. Specifically, XCS declared a non-cash capital gains distribution of $2.19219 per unit in December, 2021.

Phantom distributions can be tricky for investors (and, as we’ll see, brokers) to understand, because investors don’t receive any cash or additional units. All that’s “distributed” in such cases is the fund’s annual capital gains tax liability, which is then included on the investor’s T3 slip and taxed in his or her hands (assuming the units are held in a non-registered account).

To determine whether a particular ETF declared a reinvested distribution, check the ETF company’s website at the end of the year. Most publish the “distribution characteristics” of their funds, which includes the components of each distribution, including the amounts – if any – that were reinvested.

As confusing as phantom distributions are, it’s important to track them because they affect the cost base of your units. Specifically, any reinvested distributions should be added to your ACB, to reflect the fact that you have already paid tax on them. If you don’t increase your ACB, you’ll end up having a larger capital gain – or smaller capital loss – when you eventually sell your units.

Now, back to your question about XCS. We’re going to do a little math, but I’ll keep it simple.

You owned 200 units of XCS, and each unit declared a reinvested distribution of $2.19219. If we multiply those two numbers together, we get a total reinvested distribution of $438.44.

Next, if we add the reinvested amount of $438.44 to your original cost of $4,013.95, we get a new ACB of $4,452.39. But that’s still well below the ACB of $4890.83 listed on your T5008 – $438.44 below, to be precise.

Wait. Where have we seen the number $438.44 before? Holy coincidence, Batman! It’s the value of the reinvested distribution on your 200 shares, down to the penny.

What appears to have happened here is that your broker mistakenly added the reinvested distribution to your ACB not once, but twice. Kind of like how my Mom’s broker doubled the ACB of her CIBC shares.

These are not isolated cases. I’ve heard from countless readers who have received incorrect ACBs from their brokers. These examples underline why it’s important for investors to double-check their brokers’ ACBs to verify their accuracy. Brokers don’t want to be on the hook for such errors, which is why they typically post a disclaimer stating that the average cost is provided for information purposes only and that clients are responsible for determining the correct figure for tax purposes.

In the two examples above, the error would have actually worked in the investors’ favour. That’s because an ACB that is higher than it should be, will reduce the capital gain, or increase the capital loss, when the shares are eventually sold – both of which are beneficial for tax purposes. That’s assuming the CRA doesn’t catch the mistake.

But there are also instances when an ACB is lower than it should be, which will increase the capital gain, or reduce the loss, when the investment is sold. That’s why it’s a good idea to make sure your ACBs are correct before filing your return.

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

Follow John Heinzl on Twitter: @johnheinzlOpens in a new window

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