Support for ETFs #16
Description
As usual, the more complex tax considerations are for non-reg accounts.
Link:
https://www.advisor.ca/tax/tax-news/tax-and-etfs-what-you-need-to-know/
In a non-reg account there are 6 buckets for a distribution (and a bucket for foreign-tax-withheld):
distribution cash: interest, foreign income (taxed like interest), dividend, cap gain return-of-capital: reduce the adjusted cost base reinvested: increase the adjusted cost base (cap gain)
Since the adjusted cost base is not applicable to the holdings in a registered account, what happens with such distros in a registered account? Answer: nothing!
Can a single distribution be divided into parts, as in part interest and part dividend? Yes, according to the RBC link below.
When is tax withheld? Only for foreign income? Correct.
ACB =
total purchase price (including commissions)
+ reinvested distributions
– return of capital
ETFs are priced like stock. They trade like stock. Whole shares, not fractional. The market price is for almost all purposes the same as the net asset value (NAV).
Sometimes the commish is 0.
Link:
https://www.taxtips.ca/personaltax/investing/taxtreatment/exchange-traded-funds.htm
- return of capital is not taxed (and reduces the ACB) - reinvested cap gain is taxed (and increases the ACB) - the details on the changes in the ACB may be non-obvious - when shares in ETFs are sold, the result is a capital gain or loss. - US ETFs are more complex
A distro can be a combination - part dividend, part interest, part cap gain, for example.
They describe some monkey business with the market price dropping by the amount of a dividend. Is similar to a stock going ex-dividend? Yes, they call it ex-distribution.
Reinvestment can happen for any form of distribution, not just for cap gain.
Reinvestment always increases the ACB, no matter what form it takes.
"When a distribution is reinvested in additional shares/units, it’s still immediately taxable in the exact same way as it would be if you had received cash. But additional care must be taken to ensure that the Adjusted Cost Base (ACB) is calculated correctly."
Link:
https://www.td.com/ca/en/asset-management/documents/investor/pdf/solutions/how_ETFs_are_taxed_en.pdf
Phantom distro = reinvested income / capital gain.
It's unclear to me what exactly happens when I elect to reinvest all distros. What if it's a dividend that's reinvested? Does it only change the ACB? Does nothing else change?
Link:
https://etfsage.com/FAQ.php#fees
PACC, DRIP, and SWP
Link:
https://www.vanguard.ca/en/advisor/products/products-group/etfs/VRIF
See "Annual Distributions". Example of yearly distro buckets.
It's bizarre to me that for distros that only change the ACB, they seem to be a complete non-event in registered accounts, because registered accounts don't track ACB.