My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, April 17, 2017

Realized Capital Gain/Loss Reports – Rely on Them at Your Own Risk

Back in the day, when I was young and energetic, during tax season I would write a series called Confessions of a Tax Accountant, in which I would highlight contentious and/or interesting issues that arose in my practice.

On a few occasions (especially in the middle of tax season when I am most cranky), I wrote about the inaccurate capital gain/loss reporting by some financial institutions. These reports can be flawed in three ways:

1. Incomplete cost base information for U.S. stock holdings
2. Failure to reduce the adjusted cost base ("ACB") on the sale of flow-through shares.
3. Phantom or inaccurate information on the disposition of stocks and mutual funds.

U.S. Stock Holdings

Many financial institutions provide you capital gains summaries in $U.S. based on your U.S. purchase price and U.S. sale price. If you then multiply that gain by say the average foreign exchange rate for 2016 your capital gain/loss is wrong since you need to translate the purchase and sales price for each stock sold at the F/X rate on the day of purchase and sale. I wrote about this issue in this blog post and will only add; that I have seen this again several times this year and you should inform your advisor you want this report in $Cdn based on the conversion rates when you purchased and sold any stock.

Flow-Through Shares

I discussed this matter in this 2014 blog post. The issue was, and still is, that the capital gain or loss reported by financial institutions on their realized gain/loss report is almost always incorrect. Why? This is because the initial ACB of your flow-through share should be reduced by the resource tax deductions claimed in prior years and these reports typically ignore this cost base reduction and reflect the original purchase price, not the reduced ACB.

I have been told that from a liability perspective, the financial institutions do not want to get into making tax cost base determinations, especially in respect of flow-throughs (although, I have seen some of the better investment advisors and investment management firms adjust this on their own) and thus, they put general disclaimers on the report that the institution is not responsible for the accuracy of the capital gain/loss statement. While I can understand this position, I cannot understand why the financial institutions do not put an asterisk beside these calculations with a comment that the ACB may have been reduced by prior tax deductions claimed to at least highlight this issue.

Phantom Gains and Losses

This year, in addition to the above issues, I have already twice noted very significant errors in the general realized capital gains/losses reports that the financial institutions send to their clients. I think because I am involved with wealth advisory services that I am more finally attuned to these issues, but in one case there was a massive phantom gain that made no sense since the fund was an income preservation type account and in the other, the report reflected a huge loss in a conservative balanced stock fund that seemed unlikely given the recent strength of the markets.

In the first case, I spoke directly to the advisor for the financial institution. They investigated and reported back that I had identified an error (a complicated transaction had taken place and had not been accounted for correctly) and they would amend my clients report and further, that they would have to amend all their other clients’ reports.

In the second case, I asked the client to call his advisor to double check. He was told the error had been caught and an amended report was on its way.

To be fair, with people moving from institution to institution, cost base numbers can easily get “messed up” and there are some very complex transactions that also cause ACBs to be reallocated.

So the lesson you should take from today is: when you receive a realized gain/loss report from your advisor, take a quick scan through it to see if something seems out of whack, on either the gain or loss side.

Note: I am sorry, but I do not answer questions in April due to my workload, so the comments option has been turned off. Thus, you cannot comment on this post and past comments on other blog posts will not appear until I turn the comment function back on. 

This is my last post for a couple weeks, so see you in May.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.