Return of Capital in TFSA

Chris Sowerby

I have been reconciling the Adjusted Cost Base of my securities against statements from my financial advisor, and inserting a Return of Capital transaction to align the two values. I know the ACB is meaningless in a Tax-Free Savings Account, but I'd still like to see the correct values everywhere. Normally when I enter this transaction in other accounts, I select that same account as the Transfer Account. However in a TFSA, the Transfer Account field is greyed out and cannot be selected.
As a result, the Return of Capital amount changes the cash balance in the TFSA, which I do not want. I could enter a Miscellaneous Income/Expense amount to offset this, but that's starting to get complicated.

Any other workarounds to suggest? Maybe Quicken can explain why this functionality is restricted for TFSA only.

I'm using Quicken 2019 Home & Business Canada R22.29

Tom Young

"As a result, the Return of Capital amount changes the cash balance in the TFSA, which I do not want."

Well, ordinarily a Return of Capital should change the cash balance in the Account, so I'm assuming that the reason you don't want to change the cash balance is that you're learning, after the fact, that some other distribution previously received, a dividend say, actually turns out to be a Return of Capital.  If that's the case then obviously the "dividend" amount, (or whatever), recorded in the Account is wrong, so it's appropriate to reduce the amount of dividends recorded in the Account, offsetting the Return of Capital.

For what it's worth, if I try to do a Return of Capital in an IRA Account then the "Transfer account field is also unavailable.

Chris Sowerby

Thanks, Tom. You're right - I normally use Return of Capital to reflect a distribution in a mutual fund, in which case there is no cash impact. In this case I am actually adjusting the ACB because my investment account shows dividend reinvestment transactions at the current-day market value rather than the actual stock purchase price which is an average over preceding days. It would be a lot of work to look up the true acquisition price for each transaction so I decided to do an annual reconciliation instead. You are completely correct that I should offset the Return of Capital with a reduction (or sometimes an increase) in the dividends paid out by that stock.

rhains

Chris, how did you resolve your TFSA adjustment? I have the same issue, and I do not like the idea of a ROC and an expense to match the numbers.

Tom Young

@rhains

Please describe your situation in greater detail as I seem to recall that there's possibly a unique "Canadian" aspect in play here.

In the ordinary situation where you are informed, after the fact, that some of the "dividend" money distributed to you actually was something else, (a return of capital in this thread), then entering the return of capital as such in Quicken in appropriate, and entering an offsetting entry to use the "cash" resulting from the return of capital transaction is the correct accounting overall.  Here's an example of that.  Although the 1099-DIV in this case wasn't received until well after 12/31/17. the 12/31/17 entries made in the transaction list had the effect of leaving cash in the Account unchanged and got the and got the return of capital and the dividends for 2017 properly stated:

There's no need to use some sort of made-up expense in this situation, the ROC actually did reduce the reportable income for 2017.

However, if my memory is to be believed, I think there's some sort of situation in Canada, maybe involving mutual funds?, where you are supposed to reduce your basis in an investment even though no cash was received?  Is this your situation?

Chris Sowerby

The original question related to entering an artificial ROC transaction to change the ACB where my financial institution had provided a slightly incorrect share price for a DRIP purchase. I was doing this inside a tax-free savings account, so I had to add a dividend transaction to balance out the cash implications of the ROC because Quicken wouldn't let me transfer the cash back to the same account. To answer @rhains, I did not find another way to do this so I just make an annual adjustment to reconcile the ACB of affected shares for my records (the value is meaningless for tax purposes due to tax-free status of the account). Only a handful of securities are involved, so it's not a lot of work. @Tom Young I think the only Canadian peculiarity in this situation is the TFSA which is an entirely tax-free account. When I need to do the same adjustment in an RRSP (a tax-deferred account), Quicken does let me use a RtrnCapX transaction to return the cash to the same account in one step.

q_lurker

@Chris Sowerby wrote:

 In this case I am actually adjusting the ACB because my investment account shows dividend reinvestment transactions at the current-day market value rather than the actual stock purchase price which is an average over preceding days. 

Let me see if I have this correct -- You download a transaction from the TFSA manager that says you bought as a reinvestment 2 shares for $11/share for a total dividend of $22.  That $11/share price was the current price for that security on that date.  Then later someone adjusts that price to $10.90 /share based on the average price of that security across a few days preceding the reinvestment.  Turns out your dividend (and the basis of those 2 shares) wasn't $22, it was only $21.80.  This happens multiple times per year (quarterly, monthly, each paycheck, or some such frequency).  Rather than correct each of those downloaded transactions with errant prices, you want to make one end-of-year correction.  Do I have that concept right?

Your method of a once-a-year correction using RtrnCap probably works in aggregate.  The total cost basis for this holding in this account would get adjusted as you expect.  But the cost basis on every lot would each be getting adjusted rather than just the most recent lots.  I am a little too OCD to like that solution.  I'd be more likely to adjust each of this year's reinvestment transactions in some approximate manner and avoid the RtrnCap / MiscExp sequence. 

I further note you are just trying to match up with your financial and you recognize the non-importance of ACB in your TFSA account.  So this all becomes -- personal choice.   

Chris Sowerby

@q_lurker Yes that's the situation I have. You're right that ACB wouldn't be 100% accurate in the case of a partial disposition, but I'm willing to live with that. I already thought it was a bit OCD to be worried about having the right ACB in a TFSA, though the quest for accuracy could be taken to another level if necessary!