Tax on capital gains distributions from US/Canadian ETFs

Hi,

I hope somebody can help me with this.

It seems there are quite a few ETFs in the US and Canada that have capital gains distributions, especially ETFs with a high turnover of holdings. These distributions are often fully reinvested. See https://www.vanguardcanada.ca/indiv...tail/etf/portId=9795/assetCode=equity/?prices
for example (near the bottom).

Do we have to treat these as if they were dividends and pay income tax on them, even though they are reinvested? Or are they liable to capital gains tax, or not liable to tax at all? (Note: I am not talking about capital gains that arise when we sell the ETF; I'm referring to distributions from the fund.)

Thanks

In general, capital distributions are treated as a part disposal of shares and are subject to CGT. I wouldn't expect the fact that the capital distributions are subsequently re-invested would change the tax treatment but I think you really need to take specialist tax advice on this one.

The ETF that you referenced is pretty unusual in that it's actively managed (and hence the high turnover of holdings, leading to high capital distributions). The level of capital distributions on most US index tracking funds/ETFs is generally trivial.

Thanks, Sarenco. I suspected that the distributions were liable to some form of tax even if they were reinvested.

Does this Revenue Note cover the situation I have referred to with the Canadian ETF, do you think?
https://www.charteredaccountants.ie/taxsource/1997/en/act/pub/0039/nfg/sec0583-nfg.html

Yep, that note corresponds with my understanding of the position.

OK, cool. It would be a headache for tax/accounting purposes, but it should be possible to create a spreadsheet for tracking the disposals. I wonder if we're meant to use the FIFO rule when attributing costs to these shares?

The fact that they are reinvested throws up other questions. Are they treated as new shares bought at a potentially different price? If so, can we reduce the value (on paper) of the ETF holding by the amount of the distribution for CGT purposes? (Otherwise we would be paying CGT a second time on a portion of the holding when we sell, it seems.)

From my quick Googling it seems that capital distributions are more common amongst Canadian ETFs that US ones.

Paul F said:

From my quick Googling it seems that capital distributions are more common amongst Canadian ETFs that US ones.

Click to expand...

While I won't pretend to know much about Canadian ETFs, I can't see any logical reason why that would be the case.

Most traditional, broad market, index funds/ETFs in the US, particularly if they have been around for a while, distribute little or nothing in the way of capital gains and I can't think of any obvious reason why the situation would be any different in Canada.

The position would obviously be quite different with actively managed funds/ETFs, which invariably have a higher turnover of holdings.

Exit tax on UCITS to be reduced to DIRT level, in this budget and 2018 budget. 37% tax on gains, from 41%.
Its part of the pre-budget drip-feed on information, reported in Sunday Times, front page of business section. This is indeed good news for investors.