cost basis

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Norbert Schlenker
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Post by Norbert Schlenker »

You can always tell the Canadian broker to get stuffed. Your cost is your business, not his.

For US tax purposes, your basis depends on what the trust did when it distributed the securities. The trust has an option that allows it to pass property to you at its cost (i.e. no capital gains for the trust or its beneficiaries at time of distribution), at FMV (i.e. taxable gains that must be reported by beneficiaries), or anywhere in between. Contact the trustees to find out what they did. Chances are they distributed at cost, so your cost is the trust's cost. But check.

If the trust distributed at cost, your ACB for Canadian tax purposes is not clear. An argument can be made that, if the trust makes a distribution that it elects to value at $x ($x being somewhere between actual cost and FMV, inclusive), then your cost should be $x. That's domestic US tax law and domestic Canadian tax law too.

But you are in Canada and the trust is non-resident, so Canadian tax rules don't apply to the trust's choice of value at distribution. So the following argument is also plausible. The distribution is analogous to Uncle Joe, a US resident, giving you some appreciated property. In such a case, it's clear that your Canadian cost base is FMV. The US tax consequences for Uncle Joe are irrelevant to the question of your Canadian cost base.

As far as I know, this particular situation of an in-kind distribution from a non-resident trust is not explicitly addressed in Canada's Income Tax Act. You need a legal opinion from a qualified tax lawyer on this issue. When you get one, come back and tell us what the answer is. We'd all like to know.
nelsona
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Post by nelsona »

But I would agree with Norbert that your determination of cost, whatever that turns out to be is of no business to the broker, anymore than it would be if you transferred shares of IBM that you bought in 1970 to his brokerage .


<i>nelsona non grata... and non pro</i>
Carson
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Post by Carson »

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote"><i>Originally posted by nelsona</i>

But I would agree with Norbert that your determination of cost, whatever that turns out to be is of no business to the broker, anymore than it would be if you transferred shares of IBM that you bought in 1970 to his brokerage .


<i>nelsona non grata... and non pro</i>
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

Good advice, Norbert.

In defence of the oft maligned broker (and speaking as an accountant), it may simply be that he/she wishes the year-end capital gain/loss reports to be accurate. Brokers are stressed by the many inquiries from clients and their accountants during tax season. [:(] The time of the transfer is often the best time to establish the correct cost bases and record them.

Besides, good investment advice should also take into account the tax impact to the client. So, your broker knowing where you stand with accrued gains/losses is not a bad thing. Also, the broker's request has gotten you started on finding out your cost basis, which you will need eventually. And, Norbert's advice about checking with the trustees about how the transfer was done is best acted on close to the transfer, rather than years after the fact when memory fades.

Carson
nelsona
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Post by nelsona »

I used to get a slip of paper with every Quarterly from my brokerage, stipulting that they were not responsible for determining cost basis of vehicles not purchased thru them, and that any figurs they used on their statements were not to be contstrued as actual cost basis.

Guess they've seen the light.

<i>nelsona non grata... and non pro</i>
Carson
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Joined: Wed Oct 27, 2004 1:00 pm
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Post by Carson »

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote"><i>Originally posted by nelsona</i>

I used to get a slip of paper with every Quarterly from my brokerage, stipulting that they were not responsible for determining cost basis of vehicles not purchased thru them, and that any figurs they used on their statements were not to be contstrued as actual cost basis.

Guess they've seen the light.

<i>nelsona non grata... and non pro</i>
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

Ah, that's a clear example of the constant battle between professionals trying to do the best job for their clients versus the advice of the legal weenies (with due respect to the legal profession [8D]). Of course, given the current litigious environment, the advice is often necessary.

Carson
Norbert Schlenker
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Post by Norbert Schlenker »

It's a standard disclaimer in Canada. Since average cost is the rule north of the border, a broker cannot know for certain the tax cost of positions even if they were purchased at their shop. If you use a DRIP for some shares, the broker's view is almost certainly wrong (probably too low; your capital gains liability is less than it seems). With the recent proliferation of publicly traded trust units in Canada, many of which pay distributions that are a blend of taxable income and a return of capital (which reduces one's tax cost; your capital gains liability is more than it seems), brokers are completely at sea.

The owner of any taxable account must know his/her cost. If you are an owner and you are relying on someone else for the reliability of this information - whether in Canada or the US - you are asking for trouble. Keep good records yourself.
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