In my last blog post, I explained how RBC Direct Investing was not properly tracking the cost base of US dollar securities held by their clients.  Another area where RBC (and presumably many other brokerages) is dropping the ball for their clients is with their return of capital (ROC) adjustments.  RBC mails out their Summary of Security Dispositions report in February of each year, but this report has not yet adjusted the cost base downwards for any ROC received during the prior year (in the past, RBC updates this in April of each year).  This means that if you sold a security during the previous tax year that had a portion of its distributions paid out as return of capital, you may have understated your realized gains (overstated your realized losses) for the year.

For example, let’s assume an investor placed a trade to buy 6,500 shares of the iShares S&P/TSX Capped REIT Index ETF (XRE) on January 7, 2014 (settlement date), at a price of $15.35 per share (for a total cost of $99,784.95, which includes a $9.95 commission):

Initial Book Value = 6,500 shares × $15.35 per share + $9.95 commission= $99,784.95

On December 4, 2014 (settlement date), the investor sold all 6,500 shares of XRE at a price of $16.52 per share (for total proceeds of $107,370.05, including the $9.95 commission):

Proceeds of Disposition = 6,500 shares × $16.52 per share – $9.95 commission = $107,370.05

In February of the following year, RBC mailed the investor a realized gains and losses summary for the 2014 tax year.  It included the following information:

Summary of Security Dispositions 2014 (Unadjusted)

SETTLEMENT DATE SECURITY AMOUNT BOOK VALUE GAIN/(LOSS)
December 4, 2014 -6,500 shares

ISHARES S&P/TSX CAPPED REIT INDEX ETF (XRE)

107,370.05 99,784.95 7,585.10

 

After quickly reviewing the report, the investor included the $7,585.10 capital gain on their 2014 tax return.  As the report had not included the ROC adjustment for the 2014 tax year, the investor ended up paying less tax than they owed.

Don’t ROC the boat with CRA

The client should have adjusted their book value downwards to account for the ROC distributions received prior to the sale of XRE.  I’ve included the adjustments in the chart below:

RECORD DATE ROC PER SHARE ($) SHARES HELD ON RECORD DATE BOOK VALUE ADJUSTMENT ($)
January 28, 2014 0.02201 6,500 -143.07
February 25, 2014 0.02201 6,500 -143.07
March 21, 2014 0.02201 6,500 -143.07
April 25, 2014 0.02111 6,500 -137.22
May 27, 2014 0.02111 6,500 -137.22
June 20, 2014 0.02111 6,500 -137.22
July 28, 2014 0.02177 6,500 -141.51
August 26, 2014 0.02177 6,500 -141.51
September 19, 2014 0.02177 6,500 -141.51
October 28, 2014 0.01883 6,500 -122.40
November 25, 2014 0.01883 6,500 -122.40
Total     -1,510.20

Source:  CDS Innovations

After we adjust the book value downwards by $1,510.20 to account for the return of capital distributions, we end up with an actual book value of $98,274.75 ($99,784.95 – $1,510.20).  The client should have reported a realized capital gain of $9,095.30 during the 2014 tax year ($107,370.05 – $98,274.75).

Summary of Security Dispositions 2014 (Adjusted)

SETTLEMENT DATE SECURITY AMOUNT BOOK VALUE GAIN/(LOSS)
December 4, 2014 -6,500 shares

ISHARES S&P/TSX CAPPED REIT INDEX ETF (XRE)

107,370.05 98,274.75 9,095.30

 

It is important to note that the investor is ultimately responsible for tracking their adjusted cost base.  However, brokerages should be aware that many investors may not be making these adjustments.  If they simply changed their process to adjust the book values for return of capital distributions prior to sending out their Summary of Security Dispositions report, this would solve a number of inaccuracies on their report.