Friday Dispatch–Investment Tracking

When a new client comes through the door with a Holdco, one of the most frequent questions we are asked is why our firm does such detailed investment tracking for clients. Usually it goes something like “Oh my broker does all of that, so we are good, right?”

And unfortunately, that is not quite right.

A recent civil case out of Ontario (Chen V TD Waterhouse Canada Inc [2020 ONSC 1477]) shows just how important it is to keep track of your investment purchases.

How It Is Supposed To Work

The way the tax system works for investment accounts is as follows:

You open an account;
You buy securities;
You sell the securities;
At tax time you receive a T5008 form detailing your sales;

Well it all sounds straightforward, so what is the problem?

Box 20

The infamous Box 20 is the problem. Box 20 tracks what is called “Adjusted Cost Base” (ACB.) Ie. what you paid for the investment.

In a perfect world, your broker would accurately track this info for you, but as the reader knows, we are not in a perfect world. Between return of capital transactions, transfers from old accounts, securities held across multiple accounts, superficial loss rules, etc, there are many traps that can lead to Box 20 having an incorrect figure.

Case

This was a bizarre case. The taxpayer had a brokerage account with TD, and did a lot of high-volume trading. 2009 as the reader will remember was a tough year, and Chen had a net capital loss on his trading. TD issued T5008’s related to this trading, but did not include a Box 20 ACB figure. (In other words, TD stated Box 20 as $0.) And in what the judge called a “terrible decision”, the taxpayer decided that he didn’t need to file a tax return, seeing as he only had losses.

In 2012, the taxpayer was audited. What CRA saw on their end, based on the T5008’s filed by TD, were sale proceeds of $5 million and an ACB of $0. CRA decided that instead of a loss, the taxpayer instead had a $5 million capital gain, and assessed $4.1mil in taxes, penalties, and interest.

Eventually Chen filed his taxes correctly, brought an action against TD, hilarity ensued, and the judge threw the case out.

No Duty Of Care

The taxpayer argued that TD should have correctly tracked Box 20. Judge Myers felt otherwise, stating in his judgment:

“… neither the industry standards committee – including representatives of all of the major brokerages – or CRA ever required brokers to fill-in cost information in box 20 of the T-5008 form…”

Takeaway

There are a few lessons here:

You can always count on CRA to act unreasonably, and in their own self-interest;
Brokers will do their best to track ACB info, but they are not required to;
You need to accurately track your stuff;

As CRA says in their “Taxation Rights and Responsibilities” directive:

“You are responsible for reporting your total income and correctly calculating the amount of tax due.”