Netfile/capital gains problem?? | Page 5 | Income tax filing | Discussion forum

Chances are the brokerage Cost Basis is correct for most types of transactions but they will definitely be wrong in some other cases. Cost Basis is your personal responsibility, not that of the brokerage. If CRA decides to query Cost Basis, it is up to you to present the documentation on how you calculated it, including that trade confirmation slip, or account statement, or some other reference point from Investor Relations of the company issuing that security.

IOW, you must present the evidence, from 2006 if necessary if that is when you bought the security. CRA expects you to use the correct Cost Basis as Cost Basis is your own personal responsibility, not that of any other agent/brokerage, etc. I wish brokerages would have never started putting Cost Basis in the T5008. They really have no business doing so but I suspect there was pressure from somewhere, maybe CRA itself, to start reporting what 'they' carried on the form without realizing the brokerages weren't doing everything right to begin with.

Having said all that, if you use the Brokerage Cost Basis in your tax submission, there is a 99.9% chance CRA will just accept it. After all, if you present the same data as the T5008, there is not much reason for CRA to flag it for follow up. Which goes to say, whatever you have done in the past is almost 100% 'water under the bridge' and probably best left alone. You certainly would not be the first to have been doing it your way.

There are many guides on how one should record and manage Cost Basis and you are supposed to educate yourself on how to do it and to record it each and every year for each transaction and save the documentation. The two best sources to learn is from TaxTips https://www.taxtips.ca/filing/capital-gains-and-losses.htm and AdjustedCostBase.CA https://www.adjustedcostbase.ca/ which has a spreadsheet tool for you to use to track Cost Basis, and in the bottom right corner Blog, a series of articles on how to calculate cost basis. There is no "first in, first out" in Canada. It is a weighted average aggregate of all purchases.

I cannot advise you what to do with 2024 because I have no idea of the extent of your transactions or how much they may not be correct. If you say all of your transactions (purchases and sales) are in USD, I am missing how you translated USD to CAD equivalent for acquisition Cost Basis, where and how you recorded it whether that was in 2006 or 2021, and disposition CAD equivalent. To my knowledge, no brokerage does that CAD equivalent conversion for you, i.e. their T5008 will show USD transactions in USD, not CAD equivalent. And if that brokerage did so, I strongly suspect they did it wrong.

A ficticious example of a USD purchase(s) and a USD disposition follows:
- Bought 100 shares of X at $30 USD on Nov 1, 2010, CAD forex rate on Nov 1/2010 = $1.20 Therefore Cost Basis is = $3600 CAD
- Bought 200 shares of X at $40 USD on Nov 1, 2016, CAD forex rate on Nov 1 2016 = $1.30. Therefor Cost Basis of these shares is $10,400 CAD. But you already have 100 shares from before, so actual cost basis of 300 shares is $14000 CAD. You keep the trade confirmation slips for your records.
- You now sell all 300 shares of X at $50 USD on July 1, 2024. CAD forex rate on July 1, 2024 is $1.44. Your disposition proceeds are thus $21,600 CAD.
- Your capital gain is $21,600-$14000 = $7600 on your Schedule 3 no matter what the T5008 says.

Anecdote: I had a relatively busy year in 2024 selling half a dozen securities. 4 of them had a T5008 Cost Basis that was far from correct.

1. In one case, it was a matter of the brokerage not subtracting ROC (Box 42) from Cost Basis on an annual basis all the way back to May 2006 when I first bought the stock. The brokerage Cost Basis was far too high because they did not subtract ROC from Cost Basis over the first many years. I used my lower Cost Basis regardless of what the T5008 said.

2. In another case, it was Pfizer stock which had spun off an entity in circa 2021 in which case it was up to the taxpayer to split the Cost Basis allocation in accordance with what Pfizer said the allocation was to each of the 2 succeeding stocks, or the taxpayer could use an election to keep the Cost Basis completely with Pfizer and assign zero Cost Basis to the spinoff. I had done the former while the brokerage made an erroneous assumption that I did the latter. Thus again, the brokerage Cost Basis was far too high.

3. In yet another case, I had bought a Canadian interlisted stock in USD in New York many years ago. It sat on the USD side of the account because the stock issued dividends in USD but when I sold it in 2024, I wanted to have the proceeds in CAD so I had the brokerage 'journal' the stock over to the CAD side of my account first. The Cost Basis they assigned to the stock used the forex rate on the date of the journal, not the forex rate in effect on the date I actually purchased the stock. How freaking stupid is that? So again, the brokerage cost basis was wrong.

Etc, etc... There are several, usually non-mainstream, reasons why a brokerage will get Cost Basis wrong. That is why the taxpayer is solely responsible for Cost Basis.

Final comment: It has been generally posted on internet forums in recent (10?) years that brokerages are doing a better job of accurate Cost Basis reporting/recording and in most cases, I find they have been accurate for 'run of the mill' transactions. Chances are for most people reading this post, there is reason to believe Cost Basis has been recorded properly. In which case, it is probably best to leave well enough alone for past tax filings, but there is no better time to start doing it right than right now in 2025 forward.

Thanks a lot AltaRed, I will go through your links. I convert CAD to USD during favorable times outside of the brokerage account and keep them in a USD account. Then I transfer it to the brokerage account.
Is there any reason for you to use 2006 as the base year?
I opened my margin account in 2018 and will start keeping a record for my cost basis from 2025. I will go back and try to do my cost basis per security for the past 2 years which are of more impact.
I can go back till 10 years and refile with CRA correct?

Thanks Norman1 for your inputs. For capital gains I will have to use the date of transaction for exchange rate.

It has been standard practice, and well documented, for CRA to accept either transaction date or settlement date for the basis of forex rate as long as one is consistent with one practice or the other for all transactions year after year. I have used transaction date for some 30-40 years because that is the "actual date of decision for making the purchase or sale" and that is when I have made the funds available for the purchase.

Settlement day is more logical in a corporate or institutional setting where money flow is being managed every single day, i.e. an institution may convert funds same day as payment is due (settlement). It ultimately does not matter and there is material on the internet from CRA, CPA, etc. saying that either methodology is acceptable. It matters even less these days with T+1 settlement versus T+3 settlement of years past.

You will note that T5008 slips use settlement date for date of transaction but I enter Transaction Date in Schedule 3 and have never heard 'boo' from CRA all these years. Again, consistency is key so that one is not caught cherry picking between the two for financial (taxation) benefit.

Zgic, there is nothing magical about 2006. I simply use that as a reference date in my examples and I have a habit of doing that since I came back to Canada in 2006 and date of entry set the new Cost Basis for my portfolio. My point is that I have Cost Basis records for securities going back to that 2006 entry date and brokerages at that time were not nearly as effective, efficient and correct in Cost Basis records. We, as investors, used spreadsheets and Bank of Canada daily (et al) forex rates to maintain our Cost Basis records. I still keep PDF copies of trade confirmation slips of stocks I bought back then and still hold as evidence to justify my Schedule 3 entries. I have never relied on the T5008 (a relative recent offering by brokerages) to populate my Schedule 3 entries.

I cannot advise on what you should do as regards getting your Cost Basis up to date, nor whether should you go back and refile/correct several years of past tax returns. I probably would let sleeping dogs lie and simply do it correctly going forward. Only you know whether to open that can of worms. What I would do however, is start with securities you still own and ensuring the Cost Basis is correct on those back to 2018 when you started this journey, so that when you sell them in 2025 and beyond, you have correct Cost Basis for every security you still own.

I do not know which brokerage you use but I suspect most mainstream brokerages are probably keeping your Cost Basis correctly if you have had normal trading activity, e.g. no corporate spinoffs, no journaling between CAD and USD side of accounts, no Canadian domiciled securities (ETFs) with year end non-cash capital re-invested distributions (some get this one right while others do not), ROC adjustments that lower Cost Basis (trusts such as ETFs, mutual funds, income trusts like REITs, etc). It is these latter things for which brokerages do not always get Cost Basis correct.

Thanks to all for the valuable information about T5008 slips (they do not always involve a Schedule 3 Capital gain or loss), currency conversion dates to be used for stock CG purposes, cost basis options when receiving company spinoffs, etc and finally a great rant from AltaRed......to which I would like to add....In this day of computerization, why don't tax slip issuers include the day's exchange rate along with foreign stock purchases/sales? And with so many mistakes with Adjusted Cost Base, why not include the statement, "While we strive for accuracy, the figures provided my contain errors.".

The more I learn about the complex tax consequences of capital gains investing, the less I want to risk dabbling in it!

A test is not going to help. People will find ways to pass the test without actually understanding the material.

Every full service broker I've dealt with had to take the Canadian Securities Course and pass the exam to be licensed. Some of them obviously knew less than I did back then and didn't really understand equity investing.

It wasn't until years later I learned that they were licensed as dealing representatives (salespeople) and not advising representatives (people who can legally give original investment advice).

Norman1 said
A test is not going to help. People will find ways to pass the test without actually understanding the material  

That was my (sarcastic) point. Same as there are drivers on the road who shouldn't be anywhere near a motor vehicle.