Last week I offered some tips for investors who are tracking their adjusted cost base with Vanguard ETFs. In this post I’ll offer similar advice for those who use BMO exchange-traded funds. These tips expand on As Easy as ACB, a paper co-authored with Justin Bender, which thoroughly explains how to calculate the adjusted cost base of your ETF holdings.
The BMO Equal Weight REITs (ZRE), which is the real estate component the Complete Couch Potato portfolio, provides our first example. You can start by downloading the BMO ETF 2013 Tax Parameters, which gives a summary of all distributions for the year. Scan the list until you find ZRE.
Notice ZRE reported both return of capital (ROC) and capital gains in 2013. ROC is normally paid in cash, and although it appears in Box 42 of your T3 slip, it’s not taxable in the year it’s received. However, it lowers your adjusted cost base and therefore increases your future tax liability.
Capital gains are taxable in the current year (they’ll appear in Box 21). However, most ETFs reinvest capital gains rather than distributing them in cash, and all non-cash distributionsincrease your ACB and therefore lower your tax liability when you eventually sell shares. But when you visit the ZRE website and click the Distribution tag, you’ll see that ZRE reported no reinvested distributions for the year:
To confirm this, however, you need to visit CDS Innovations (see our white paper for full instructions) and download the spreadsheet with the complete tax breakdown for ZRE. The spreadsheet has a column for each of the ETF’s monthly distributions of $0.081 per unit, and they were indeed all in cash. As suggested on the BMO website, there were no non-cash distributions:
The point here is that investors may assume capital gains distributions are always reinvested, but here’s an example where that’s not the case. Even though ZRE reported capital gains last year, they were all paid out in cash, so they do not increase your cost base.
A numbers game
The CDS spreadsheet will also hel