ETF Phantom Distributions

[gbenn]

How do I enter phantom distributions? I own an ETF (VGRO) on the TSX and at the end of 2018 the ETF declared a non cash distribution (capital gain) of.080223 per share. My total shares of VGRO is 2000 and after the phantom distribution it remains the same at 2000 shares. The only change is that the distribution of $160.45 (2000*.080223) was added to my book value. For tax purposes I treated this as a capital gain (that I did not actually receive) in 2018. I cannot see how to enter this amount without specifying a value for number of shares as well. No new shares were created by this distribution because it was done within the ETF itself. Any thoughts? I’m running the latest version of Fund manager.

[Mark]

Hi gbenn,

Since they issued a distribution that you didn't receive, it was essentially reinvested. Since you ended up with the same number of shares this was essentially a split. You could record 2 transactions:

1) A Reinvested Distribution for $160.45 for X shares. You'd have to figure out X based on the pre-distribution per share value. This X value actually isn't too critical, as you're going to eliminate it with the next transaction.

2) Record a split with a ratio of (2000 + X) for 2000 shares, so you end up with 2000 shares at the end.

[Allan]

Mark,

I also have have run into the Phantom Distribution, and have adjusted in the manner you have suggested - just a quick point you are missing a step because in your 2nd instruction you invariably end up with a fractional share which now must be transferred out; so a little math and fidgeting of the numbers is required to arrive at an even number of shares again. For clarity - and because these entries are a little obtuse, I also include a note detailing the transaction and the calculations. Thus I end up with 4 entries to record and document a single non-cash distribution.

In 2021 several ETF's are now reporting non-cash distributions. Due to the increase in non-cash distributions associated with these ETF's it may be time to actually incorporate the logic as part of the Fund Manager program.

I would propose the following be considered as an improvement to the program: a single entry for recording of "Phantom" non-cash distributions for ETF's with the following 5 fields:
- Date Received
- Record date
- Distribution Type (ie MT-CG)
- Value of the Reinvested Distribution
- Memo

and the program should record the entry as
New ACB = (Previous ACB) + (Reinvested Distribution)

An added advantage would be the possibility of reviewing the cost basis adjustments of ETF's when selling / tax filing as these details are not be tracked / reported by the brokers or ETF managers. I currently maintain a separate record as back-up for my tax file. A report to address this would be most useful.

Any thoughts as to whether this is possible and if we might see this some time soon?

[Mark]

Hi Allan,

Thanks for the feedback/feature suggestion. We could make a dialog specific for this, but for only 2 transactions, I'm not sure it is worth making another dedicated menu command. We can give it some thought.

I didn't understand why you'd end up with a fractional share to transfer out? In my example, you end up with (2000 + X) shares, and after a split of (2000 + X) for 2000, you should end up with exactly 2000 shares.

[Allan]

Hi Mark

I do not know if Phantom distributions are a thing in the US tax environment, but does occur in Canada, and is particular to ETF's. I checked IShares and about 30% of their funds issued Phantom distributions in 2021, so for Canadian tax purposes this is not an insignificant issue.

The theory is: for securities bought and sold by the fund this is reported on the ETF holder's tax slip (usually capital gain) for the year. The ETF holder is required to pay the tax on the amount reported, even though the ETF manager has reinvested the proceeds. It is the responsibility of the ETF holder to record and track the new ACB for the shares he holds.

As mentioned - for record keeping purposes the ETF holder recalculates the ACB each year such that the [New ACB] = [Previous ACB] + the non-cash distribution reported by the fund Manager.

As discussed - Fund Manager does not have a means to record this directly so a work-around is required. I have checked the calculations a couple of ways and settled on the following:

Step 1 - REINV_M - for Value of the non-cash Distribution for [X] Shares at a specified price (I use the price as of the record date of the transaction), and the value for [X] shares being rounded to the closest full share value

Step 2 - Stock Split to reset the number of shares back to the original quantity [OQ]
Ratio = [OQ] for the sum of the shares representing [OQ] + [X]

Step 3 - TXOUT the fractional portion from the stock split (with a value of zero).

Step 4- create a note for record purposes.

If we could record the equivalent of Step 1 with a number of shares of [0] it would probably resolve things, however Fund Manager requires a non-zero value. I am sure there is a very particular reason for enforcing the rule, thus the request if there is an alternate means to make this entry.

Thanks for your time on this.

[Mark]

Hi Allan,

I'm not following why you would need step #3? If you have X shares reinvested and OQ is your original share quantity, then recording a split with a ratio of (OQ + X) for (OQ) you will have OQ + X shares before the split, and exactly OQ shares after the split.

[Allan]

Mark - I agree with you on the split / fractional shares and that was what I was expecting. I just did a validation and found the following:

If I do the split on a date after I record the reinvestment the split will work. If done on the same day as the reinvestment I get a fractional share - therefore the two transactions should not be recorded on the same day.

[Mark]

Hi Allan,

Ahh, very good point.

[tktf]

I also wanted to have a simple way to adjust the cost base for phantom distributions and this is what I have been doing:
1. Record the capital gain distribution but record it as paid out, not reinvested. This puts some cash in the default cash account that you never actually received.
2. Record an "Account Fee" distribution in the exact same amount (but it's a negative) as the above transaction. This takes the cash back out of the default cash account and increases the Avg Basis by the same amount.

I also mark both transactions with a comment indicating it was a "notional distribution" - which I believe is the term used for such distributions.

Not sure if any changes have been made in later versions of Fund Manager to more easily facilitate this (but I find this simple enough to not worry about it). I am still running Fund Manager 2020 since, for now, I am still on Windows 8.1.

Is there anything wrong with this approach?

Thanks.
Steven D.

[Mark]

Hi Steven,

Nice solution. I don't see anything wrong with this approach. It is simpler in some respects. The one thing to note is that Account Fees are optionally included in your cost basis, so you want to make sure you leave on the option:

Options / Report Preferences... / Capital Gains / Include Account Fees in Basis

Or, you can record your #2 transaction as a negative Return of Capital instead of an Account Fee. Both will have the same effect, as long as you leave on that option. If you use Return of Capital, those are always included in the cost basis.

[tktf]

Hi Mark,

It is again that time of year when I record these phantom distributions. As I went through the process, I realized that my approach has a small problem.

These phantom distributions are treated as taxable capital gains (even though you never actually received any money). So the approach I've been using leaves you with income totals that don't match what is used for tax purposes. Basically, my approach takes the money out and then puts it back in - netting out to 0.

It would be better if a single transaction could be entered that counted against the base cost of the ETF without ever adding the amount to your default cash account.

Is there any way to do that with the existing software? If not, could you define a new kind of "distribution" for this purpose (it would count against your income totals and be subtracted from the base cost but not generate any change in the cash account balance)?

Regards,
Steven D.

[tktf]

Hi Mark,

Sorry - I realize there are (of course) ways to do this - which you've explained a few times. I'm really asking if it is practical for you to make it easier by following my suggestion.

Regards,
Steven D.

[Mark]

Hi Steven,

We can give it some thought, but adding a distribution type that doesn't follow the rules for default cash, that the rest of the program follows, might cause more confusion.

[tktf]

Hi Mark,

I see your point but I came up with idea based on the fact that you "kind of" allow this behaviour when copying and pasting transactions. The dialog that comes up at paste time asks if you want to make matching entries in the default cash account. So, clearly I could copy/paste a dividend and not have it show up in cash.

Anyway - thanks for considering it.

Regards,
Steven D.

[Mark]

Hi Steven,

If your goal is only to have it not show up in cash, there are a couple other ways you can accomplish this:

1) Turn off the default cash assignment on the sub-portfolio prior to recording the distribution

or

2) After recording the distribution, delete the cash side of the transaction