From Our Canadian Bureau: Tax Tips for Fund Investors - T3s are only the beginning

Now that the registered retirement savings plan (RRSP) frenzy is behind us, most of the T3 (see bottom for description of terms) and T5 slips from GICs, stocks, mutual funds, segregated funds, and other pooled investment products should have trickled in by now. (Actually, the deadline is the end of March for those slips.) However, for Canadian investors gathering their tax information, that's just the beginning.

For investors with mutual funds or other investments in taxable accounts, we must look beyond the standard tax slips to determine the ultimate tax bill or refund. Here are a few tips to make sure you get it all straight.

Whenever you sell units of a fund, or shares of a stock, there is some tax consequence - usually a gain or a loss. To figure out any gain or loss, the ACB must first be calculated. ACB is the same as book value, which is the average cost of an investment and is usually expressed per unit or share of the investment in question.

Very basically, ACB per unit is calculated by taking the total of all purchases (including any buying commissions), and dividing that sum by the total units or shares purchased. Use units or shares purchased. Technically ACB per unit is calculated as: (total purchases acquisition costs reinvested distributions) ÷ (units purchased) Only units "purchased" should be used here, not unit "balance." Why? ACB is the average acquisition cost, so only purchases impact your per unit ACB.

Let's look at an example. Suppose you make the following transactions in a mutual fund: BUY 117.6471 units @ \$8.50 per unit for a total purchase price of \$1,000 BUY 210.5263 units @ \$9.50 per unit for a total purchase price of \$2,000 SELL 150.0000 units @ \$10.00 per unit for total proceeds of \$1,500 Total purchases are \$3,000 (\$2,000 \$1,000), which bought a total of 328.1734 (117.6471 210.5263). From there, we calculate the ACB per unit as \$9.14 (\$3,000 ÷ 328.1734). The capital gain or loss is then calculated as: (selling price per unit - selling costs - ACB per unit) x (number of units sold) Selling costs can be any costs incurred to sell your investments, such as brokerage fees, redemption charges, or any other transaction related fee. In our example, the capital gain is \$129 ( [10.00 - 0.00 - 9.14] x 150 ). If the next transaction in that series is another "sell" transaction, the ACB per unit will still be \$9.14. It can't be stressed enough that the \$9.14 will only change when additional purchases are made.

For 2001 and subsequent years, only half of capital gains will be taxable. However, for the 2000 tax year, I won't even begin to try to explain the taxable amount (i.e. inclusion rate). Two federal budgets resulted in three different inclusion rates, so pay a visit to myBC.com where you'll find a summary of the tax changes for the 2000 tax year.

Those are the basics, but there are a couple of other points to mention depending on the specific investments you hold. Non-taxable distributions and cash distributions Mutual fund investors who receive distributions in cash - i.e. not reinvested - should not include such cash distributions in the above calculation. Only reinvested distributions are added. Further, there are some mutual funds that pay out distribution that are greater than the actual income generated in the fund. The result: the fund dips into the original capital to pay out the distribution. When a fund does this, that part of the capital paid out is called a "return of capital." Since it's a return of capital, it isn't taxable.