Both types of investments are subject to tax in your taxable accounts, like non-registered or corporate accounts. Tax-free savings accounts (TFSAs) are tax-free, so you don’t receive tax slips for TFSA investments, nor do you report the income or capital gains on your tax return.
Does the ACB of TFSA investments matter?
You ask about calculating the adjusted cost base (ACB) in your TFSA. Knowing the ACB is necessary in taxable accounts, but not in your TFSA. The ACB determines whether you’re selling an investment for a capital gain or a capital loss. Your brokerage often calculates the ACB for you, representing your purchases of the investment, including reinvested dividends or other adjustments.
Mutual funds are typically structured legally as trusts, so investors in taxable accounts get T3 Statement of Trust Income Allocations and Designations slips. Some mutual funds are structured as corporations, so investors instead receive T5 Statement of Investment Income slips.
In this respect, ETFs are similar to mutual funds, Barbara. Typically, they are structured as trusts and come with T3 slips, though some are corporations that come with T5 slips.
When are T3 slips typically issued?
Mutual fund and ETF issuers have until March 31 to provide T3 slips to investors, which is one of the challenges of investing in these funds. With the March 31 deadline, some investors don’t receive their T3 slips until April. So, it may be tough to file your tax return in March, unless you’re open to the possibility of filing an adjustment to your tax return for any late T3 slips.
Mutual fund and ETF trusts generally flow through all of their income and capital gains to investors. This means that if the fund buys and sells underlying assets for a capital gain, that capital gain is reported by the investor and taxable to them. This can result in a capital gain even if the investor has not sold any of their units of the fund.
For a Canadian investor, Barbara, one key distinction between mutual funds and ETFs is that ETFs can be purchased on a foreign stock exchange. Mutual funds are domiciled in Canada and are in Canadian dollars. A Canadian investor can buy ETFs that trade in the U.S. in U.S. dollars. This introduces foreign-exchange calculations to the taxation of these investments in taxable accounts.
How U.S.-dollar ETFs are taxed in Canada
When you sell a U.S.-dollar ETF, you need to report the sale in Canadian dollars based on the prevailing exchange rate at that time. You also need to calculate your cost in Canadian dollars based on the exchange rate—or rates—at the time of purchase. This can make for a little more work, especially if your ETF distributions are being reinvested.
Jason Heath, CFP
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