Clients who dispose of securities should be reporting those dispositions annually on their tax returns. Failure to do so can lead to trouble, as we learned from a recent Ontario court case.
The civil case — Chen v TD Waterhouse Canada Inc. (2020 ONSC 1477) — involved an investor who had a discount brokerage account with TD Waterhouse.
Investors who dispose of securities receive a T5008 slip (as well as a Relevé 18 for residents of Quebec), an electronic copy of which is filed with the Canada Revenue Agency (CRA). The T5008/Relevé 18 reports details of security positions that were sold, redeemed or had matured in non-registered accounts during the prior tax year.
The T5008/Relevé 18 can help to calculate capital gains and losses for tax purposes. As of 2019, several financial institutions now include the cost or book value for the security sold in Box 20 of the slip. The amount in that box reflects the total amount paid to purchase a security and generally includes adjustments for transaction charges, reinvested distributions and returns of capital for mutual funds, and/or certain corporate reorganizations related to the security.
In some circumstances, the stated book value of Box 20 might require adjustments in order to be appropriate for tax reporting purposes. For example, if a security was not purchased through the current broker, the book value shown in Box 20 could be based upon information provided to it by the firm that transferred the security, or upon the market value of the security on the date it was received.
There are other scenarios where Box 20 may not accurately report the adjusted cost base: when an investor has identical securities in more than one non-registered account, for example, or when the investor has previously realized losses that were subject to the superficial loss rules.
Until recently, the industry norm was to leave Box 20 empty or report $0 when the financial institution lacked sufficient information to report a book value.
The taxpayer was a client of TD’s discount brokerage who engaged in high-volume day trading online in 2009. TD provided separate T5008 slips to the taxpayer and to the CRA, reporting each individual sale of shares he made in 2009.
TD reported the proceeds of disposition received by the taxpayer but not the cost paid to purchase the shares he sold. As a result, the slips did not calculate his gains — TD left that box blank for all of its customers.
TD did, however, provide the taxpayer with a T5008 summary in which it reported the cost and sale price data for the year, aggregated by each stock, and the gain/loss figures for each series of securities.
The taxpayer acknowledged that the T5008 summary provided all the information he required to properly claim his capital gains and losses. Unfortunately, the taxpayer’s accountant told him that because he had suffered a net capital loss in his trading activities, he was not required to file an income tax return. The taxpayer chose not to file a 2009 return, which the judge called “a terrible decision.”
In 2012, the CRA assessed the taxpayer for 2009 based solely on the proceeds received for his sales of shares as reported by TD in the electronic T5008 form. Since the CRA didn’t have any information as to what the taxpayer had paid for the shares, it treated the full proceeds of disposition as capital gains.
The CRA assessed his total income at $5.2 million; with penalties and interest, he owed $4.1 million in taxes. In reality, he had employment income of only $9,655 in 2009, and he had sustained a net loss from his trading activities.
The taxpayer filed his 2009 income tax return and had the erroneous assessment corrected, but he claimed the damage was already done. He brought an action against TD claiming the massive tax assessment resulting from the bank’s failure to correctly fill out the T5008 forms with the CRA led to the loss of his job and inability to find alternative employment. He also argued that the assessment caused him to suffer anxiety and distress.
The judge dismissed the action and concluded that TD provided the taxpayer with all applicable cost information in its T5008 summary, adding that TD did not have a duty of care to provide that information to protect its customers from tax audits.
While the CRA’s position in this case may seem extreme, it demonstrates the need for taxpayers to be vigilant in reporting all securities dispositions.
by Jamie Golombek, CPA, CA, CFP, CLU, TEP, managing director, tax and estate planning, CIBC Private Wealth Management.