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How to record non-cash return of capital adjustment

Arctic Hare

Please explain the transaction depicted below (non-cash return of capital adjustment) and explain how to record this transaction (manually) in Quicken if it is something that needs to be recorded. The transaction appears to have no affect on cash and no affect on units held, so I am presuming it affects the cost basis, but I'm not sure how to record it.

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NotACPA

I'd use the return of capital transaction followed by a Misc Exp to remove the cash.

Arctic Hare

https://community.quicken.com/discussion/comment/20447712#Comment_20447712

OK, I can understand how that nets out the cash, but are you able to explain what this is, i.e. what causes a transaction like this to be required? i.e. what is the transaction doing (which is a different question from how to enter into Quicken)?

NotACPA

I've not seen such a txn previously … could it be something specific to Cdn security law? Or specific to BMO?

You probably need to ask either your broker, or Investor Relations at BMO.

markus1957

Just a guess but the date of 12/22/23 and the ADJ (adjustment??) suggests that a portion of a dividend from that date was reclassified as a return of capital. If you see a dividend from that timeframe, that is likely the case. To incorporate it, you would reduce the amount of the dividend by the ROC amount (11.99) and then add a 11.99 ROC transaction so the cash balance is not affected.

You would probably see that reflected in your 1099 from last year or whatever the Canadian equivalent is of that form.

Arctic Hare

https://community.quicken.com/discussion/comment/20447714#Comment_20447714

BMO is just the mutual fund manager, so I don't think it would be specific to BMO. I've seen similar transactions from other funds before and simply ignored them. This time my curiosity was piqued for some reason…

Arctic Hare

https://community.quicken.com/discussion/comment/20447733#Comment_20447733

There was, in fact, a dividend reinvestment from that date, so it you seem to be on the right track @markus1957. I highlighted reinvestment to make clear that the dividends were fully reinvested, including part units, with no impact on the account's cash balance. I may call the broker I used for this fund (RBC Direct Investing) and ask them to explain this transaction to me. When I get a chance to call them, I'll post my learning back here.

I have no idea what a form 1099 is… not a Cannuck thing, I guess. Oh, and this is held in a Self-directed, Registered Retirement account, so there are no tax implications with any transactions on this account (until funds are withdrawn from the shelter, of course… and then, whammo… but, I digress).

NotACPA

A1099 is a US tax form (received about an investment account) that shows the investment txn and their tax impact.

The info on it needs to be included (if in a taxable account) on one's US tax return.

Arctic Hare

https://community.quicken.com/discussion/comment/20447749#Comment_20447749

The Canadian equivalent is the T3 slip along with the T5 for income from trusts.

q_lurker

I would look at the reported cost basis of the fund before and after February transaction. I suspect it dropped the $40.76. I lean toward the explanation @markus1957 offered and his transaction suggestion. I’d probably date the transactions back to December and include some explanatory reminders.

Arctic Hare

https://community.quicken.com/discussion/comment/20447733#Comment_20447733

I was prepared to assert that what @markus1957 suggested won't work because the dividend was paid in units not cash, and I had entered the dividend transaction into Quicken using the Reinvest Dividend transaction type. This entry method accurately modelled how the transaction appears on the broker statement in that there is no cash component, just addition of units as payment of the dividend. However, what I can do is go back and split the dividend transaction into two transactions in Quicken where the first transaction pays cash and the second transaction buys the units using the cash. Then I can do what @markus1957 suggested and reduce the cash dividend by $11.99 to offset a RoC transaction of the same value.

Because this is a tax sheltered account, doing this additional work has no value (for this account) other than the possible satisfaction derived from having the book cost in Quicken match that reported by the broker, even though the book cost isn't required for tax purposes here. But, I will encounter this same transaction on my non registered investments, so the learning has value for properly tracking those.

I did call the broker and confirmed that this is what is intended by these Return of Capital (reduce book cost without affecting cash or units) and Notional Distribution (increase book cost without affecting cash or units).

Thanks to all who contributed here for your input.

NotACPA

I'm a bit confused. What's the "return" part of the ROC txn? Doesn't sound like you actually got anything for it. Is this some CDN accounting thing?

Because TTBOMK, an ROC always returns cash, although it might be immediately used for a purchase of more units.

Arctic Hare

https://community.quicken.com/discussion/comment/20447946#Comment_20447946

My non-technical understanding of how this works is the following… dividends pay out according to a schedule with most paying out in December. There is some degree of estimation/approximation/room for calculation error in paying out the dividend. So, if, for example, I receive $900 in dividend in December, and if that is a mutual fund it typically pays out in additional units (not cash). Then, come February or March the fund managers figure out the precise amount of dividends that should have been paid and it happens to be $890.00, then they issue a RoC for the $10 to correct for the difference between was was paid and what should have been paid. That return of capital transaction is really converting $10 worth of the previously paid dividend from a dividend to return of capital. I already received the value - paid in units - so, the only effect is to decrease the book value and I see a reduction in the book value of $10 if I compare the March statement to the February statement. Put another way $10 of the $900 dividend was really returning my capital, so the book value needs to be adjusted to reflect that I got $10 back - appreciating that I was compensated in units rather than cash. So, in effect, yes, I did "receive" the $10, it was simply paid two month prior and paid out in units versus cash. I hope my explanation makes sense. Put another way, all these RoC transactions are corrections to small errors in dividend payouts.

I don't know if it is just a Canadian thing, but with most brokers the default way to pay dividends on mutual funds is pay them in units. Some also offer this on ETFs, with the difference being that mutual funds would pay completely in units, including party units; whereas with ETFs you can only receive whole units, so you get cash for the what would be part unit portion. You can opt to receive the dividends in cash, but the advantage to taking them in units is that you get to buy additional units with no transaction fee.

q_lurker

My two transactions would be:

RtrnCap specifying security and amount with cash going into the account.
MiscExp with same security and amount with the category of _DivInc.

As stated earlier, I would choose to date these in December since they became applicable then. User choice.

As an example:

The MiscExp transaction reduced the original $900 'Dividend' to $890, because that original $900 was really $890 dividends and $10 Return of Capital. Nevertheless, the full $900 was 'reinvested' as additional shares of the security.

This sequence is not unusual in US funds or securities either, especially real estate limited partnership securities and funds.

Tom Young

I typically simply reduce the _DivInc amount directly using the Div action :

Comes out the same either way.

NotACPA

@Arctic Hare I guess what's a bit surprising, although I have heard of it before, is a previously paid dividend being re-stated into something else.

In almost 50 years as a customer of Fidelity Investments, I don't recall ever seeing this on any of my funds … which is almost all of what I hold. Only exception is stock of my former bank employer, and I'm sure they've never done such.

Arctic Hare

https://community.quicken.com/discussion/comment/20447958#Comment_20447958

I can't offer much on the parameters as to when this happens or explain why I commonly encounter this and you never have. At a quick glance, I also see this has happened recently with some of my Vanguard and ishares ETFs; therefore, in my case, it is not limited to mutual funds. I haven't reviewed my statements on the USD side of my account to see whether the same thing happens there. I'm going to guess that if the issue is particular to certain parties then it would be particular to the fund manager and not particular to the broker. I expect the broker is simply processing transactions as reported by the fund manager. I don't currently have any Fidelity funds in my portfolio. Also, as a Canadian, I can readily buy ETFs traded on US exchanges, but I can't buy US mutual funds… or, if there is a method to do that, it is not obvious or commonly done. So, all my mutual funds are from Canadian mutual fund companies; conversely, some of the ETFs I hold are traded on Canadian exchanges and some trade on US exchanges.

NotACPA

My fund company, and brokerage, are both Fidelity.

Arctic Hare

https://community.quicken.com/discussion/comment/20447965#Comment_20447965

My portfolio involves two unrelated (self-directed) brokers, more than 10 fund management companies that shift with time, trading in two countries on multiple markets in each country, and two base currencies. It is perhaps not surprising I bump into a few things you don't see in a portfolio held with one firm that is both fund manager and broker.

I do envy the simplicity of your approach ;-)

q_lurker

I should clarify myself. On my 1099 forms (US tax reports from brokerages to investor) I occasionally see data in a column like "Non-dividend Distributions" as well as in the "Dividends" column. For those situations, the reported Dividend and Non-Div Distribution invariably add up to what was reported in transactions throughout the year as simply Dividends. It is for those cases that I use the RtrnCap transaction to change the total amount of dividends received to the lesser number. Usually the brokerage is on top of things and I find a corresponding change in the basis of the holding. In a few cases I have had to prompt them to make that basis adjustment.

What I don't recall seeing is a transaction in the regular statement reporting this change in basis (and change from Div to non-div-distribution) such as Arctic Hare reported in his opening post.

NotACPA

I'm a client of Fidelity "Private Client Group". I manage the funds, based upon the Fidelity-specific newsletter that I subscribe to, but I do get some benefits based upon the size of my portfolio with them.