Corporate Investment Account Bookkeeping: Why It Costs Extra

Why does an accountant charge extra for a corporation's investment account?

An investment account adds three jobs that ordinary bookkeeping does not cover: a record of each trade with its cost, income sorted by type, and tax balances that carry from year to year. No CRA rule sets what an accountant charges, so the fee follows how much of this work the account creates. The T2 asks whether the corporation received dividends (line 203), realized capital gains or losses (line 206) and, for a Canadian-controlled private corporation (CCPC), earned property income (line 207). Each yes adds a schedule.

Whether the add-on is worth paying depends on how much of this the account needs. A few funds held for years need little; frequent trades, US-dollar holdings or years of unrecorded trades need a lot.

A case is not simple when the quote does not say what the add-on buys, the corporation sold at a loss and bought the same holding back within 30 days, holds US-dollar securities, has trades from earlier years that nobody recorded, or shares its owner with a second corporation. Gather the accountant's quote, the monthly statements, trade confirmations, year-end tax slips if the broker issues them, the opening cost of each holding and last year's T2 schedules. The next section says what each record settles.

What records does a brokerage account in a corporation need each year?

Each trade needs a confirmation, each month a statement, each year-end the tax slips where the broker issues them, and each holding the corporation already owns an opening cost. With them the books can agree with the broker and the T2 schedules can be built from the books.

A broker may issue none of these slips for a corporate account. Then the statements and confirmations carry every figure, and the split of income by type is built from them. Ask the broker which slips it issues.

The T5008 cost figure is a starting point, not the answer. The CRA says it may or may not reflect the investor's ACB, so the corporation's own purchase history decides the cost.

A purchase record supports the year of the sale that uses it, so it is needed for at least six years after that year. The CRA also says records of long-term acquisitions and disposals of property must be kept indefinitely, and a long-held investment may fall under that (CRA). See how long to keep business records.

How do I track the adjusted cost base of each holding?

Keep one running cost per holding: what the corporation paid, commissions included, averaged with its earlier purchases of identical units each time it buys more. Section 47 sets the average for identical properties, so a sale draws on the average, not on a chosen purchase.

• Buying: the cost is the price plus expenses to acquire it, such as commissions.
• Buying more of the same holding: recalculate the average at each purchase. A sale does not change the average cost of the units left (CRA).
• Reinvested distributions: they buy more units, so recalculate the average. A return of capital lowers the ACB, and if the ACB falls below zero the shortfall is a capital gain of that year (CRA).
• Selling: the commission on a sale is an outlay and expense that reduces the gain (CRA). It does not change the cost of the units left.
• Two accounts: section 47 speaks of the identical properties the taxpayer owns, so the same fund held in two accounts shares one average.

The cost of a US-dollar holding in Canadian dollars, trade by trade, is in ACB in Canadian dollars for US-dollar investments.

How do realized gains and losses reach the books and the T2?

The books may carry the account at cost, or at market value with the unrealized gain or loss booked each year; ask which one is used. The CRA says a capital gain or loss generally arises when the corporation sells, or is considered to have sold, the property.

With the account carried at cost, a sale is booked as the units leaving the investment account at cost, the cash received, and the difference as a realized gain or loss. The proceeds are not revenue. The CRA computes a capital gain or loss as the proceeds minus the ACB and the selling outlays and expenses.

On the T2, Schedule 6 lists the dispositions. The taxable capital gain is 50% of the net gain, and Part 9 of Schedule 6 carries it to line 113 of Schedule 1. Schedule 1 reconciles net income in the financial statements to net income for tax, so the gain in the books and the taxable gain need not match.

A net capital loss is tracked on Schedule 4. It can reduce taxable capital gains of the three previous years, requested on Schedule 4, or of later years (CRA). A loss on a share is first reduced by the dividends the corporation received on that share and deducted under section 112. The exception covers some dividends on a share owned for the 365 days before the sale, when the corporation and persons it does not deal with at arm's length owned no more than 5% of any class of the payer's shares (section 112(3) and (3.01)). The untaxed part of a net gain adds to the corporation's capital dividend account, the balance behind tax-free capital dividends (CRA folio); see holding and investment corporations.

These steps assume the sales are capital gains. Frequent trading or buying on borrowed money can make them business income; see ACB in Canadian dollars for US-dollar investments, which covers capital gain versus business income.

How should dividends, interest and foreign income be booked, and why does the type matter?

Book each kind of income in its own account, because the T2 treats each differently and the slip already gives the split.

The box numbers are for a T5. A fund held as a trust reports on a T3, which has its own boxes; use the slip you receive.

A fund can allocate capital gains even when the corporation sells no units. The T3 amount in box 21 goes in Part 4 of Schedule 6, and a capital gains dividend (T5 box 18) on line 875. Both count when reinvested, and a reinvestment also goes in the cost history. A capital gains dividend is a capital gain of the year under section 131.

Use the corporation's own year. T5 slips cover calendar years, so reconcile them to the statements for the corporation's year. Interest on a bond or similar debt counts as it accrues to the year-end, even if unpaid, without repeating interest taxed in an earlier year (section 12(3)). Gather the rate, payment dates and last year's accrual.

The type matters because part of the tax on investment income is refundable, and the T2 of a private corporation keeps two running balances of it. Part IV tax on eligible dividends from corporations that are not connected goes to the eligible refundable dividend tax on hand (ERDTOH). Part IV tax on other such dividends and the refundable part of Part I tax on a CCPC's investment income go to the non-eligible balance (NERDTOH) (CRA). When the corporation later pays taxable dividends, it may get a refund from these balances, but only if the T2 for the year the dividends are paid is filed within 3 years after the end of that year (CRA).

Interest, foreign income and taxable capital gains can also count toward adjusted aggregate investment income, which can reduce the federal small business limit in a later year (CRA). The thresholds, the timing and associated corporations are in holding and investment corporations.

Which numbers from the account does the T2 need?

The T2 needs a gain or loss for each sale, income by type, foreign tax withheld, and last year's closing balances. Each lands on a named line of the T2.

The balances start from last year's return, so a new accountant needs the prior T2. See switching accountants.

What traps catch a corporation's investment account?

Two catch most accounts: a loss sale followed by a rebuy, and US-dollar trades. Both change what the books carry.

Selling at a loss and buying back within 30 days (superficial loss)

The loss is held back when the corporation, or a person affiliated with it, acquires the same or an identical property in the 30 days before or after the sale and the corporation or an affiliated person still owns it at the end of that period (section 40(3.3)). This is the corporate form of the superficial loss rule: it applies to a corporation in place of section 54, which leaves out a disposition covered by section 40(3.4). Units bought by automatic reinvestment of distributions are acquisitions too. A sale near year-end puts part of the window in the next year, so check the first month's statements before the year's loss is final.

A corporation is affiliated with the person who controls it, or with each member of an affiliated group that controls it together (spouses, for example), with the spouse or common-law partner of each, and with another corporation controlled by that person or that person's spouse or common-law partner. A shareholder who is not part of the controlling person or group is not affiliated just by owning shares. Section 251.1 has further cases, such as partnerships and trusts. If the person who controls the corporation buys the same fund in a personal account, the rule can apply to the corporation's loss. The CRA lists a corporation controlled by you or your spouse as an affiliated person.

The held-back loss is not gone, and it is not added to the cost of the repurchased units. Section 40(3.4) treats it as nil at the sale, then as a loss again at the start of the first 30-day period in which neither the corporation nor a person affiliated with it owns the repurchased property, or identical property bought in the 30 days before that period starts. It can also come back earlier, for example just before someone acquires control of the corporation or when a wind-up other than one under subsection 88(1) begins; section 40(3.4) lists the release times. The CRA says a corporation's loss is deferred in this way. The books then need to show the loss as held back and carry it until it is released.

US-dollar trades

Each purchase and each sale is converted to Canadian dollars at the exchange rate on the day of that transaction, so a gain or loss can come from the exchange rate alone (CRA). Currency does not decide whether a holding is specified foreign property; what the holding is and where it is held do (CRA). The rate to use and the Form T1135 test (line 259 of the T2) are in ACB in Canadian dollars for US-dollar investments and foreign property and affiliate reporting.

Is the extra fee fair, and what can I do to lower it?

A fee is easier to judge when the quote names its tasks and the number of holdings and trades it assumes; a bundled fee that does not is harder to judge. The T2 asks the same questions whoever prepares it; the fee reflects who does the cost tracking and income sorting, and how much there is. What a T2 and its add-ons cost is in T2 cost and quotes.

The work follows the number of holdings, trades and income types more than the balance.

Ask the accountant:

1. Is the fee per year or per month, and how many trades and holdings does it assume?
2. Does it include building opening cost for holdings already owned, or only the current year?
3. Which schedules does it cover: 3, 6, 7, 21 and the T1135 test?
4. How are extra trades, foreign holdings and prior-year clean-up charged?
5. What does the corporation receive: a trade log, cost per holding and an income summary by type?
6. Does the broker issue tax slips for this account, or is the income split built from the statements?

Some things cut the hours without setting the price: one account instead of several, a cost history that starts at the first purchase, and statements and confirmations kept as they arrive instead of rebuilt at year-end.

Example

These scenarios use Canadian dollars. The numbers are illustrative.

A C$300,000 account with 20 trades

A corporation in Ontario holds C$300,000 of exchange-traded funds. In the year it receives C$9,000 of dividends and C$3,000 of interest, and makes 20 trades. Assume none of the dividends is a capital-gain distribution. The add-on pays for a log of the 20 trades with commissions, an average cost for each fund after every purchase and reinvested distribution, the C$9,000 split into eligible, other and foreign dividends, and the C$3,000 of interest kept apart. The account is then tied to the books.

A sale for C$50,000

The corporation owns 2,000 units of one fund: 1,000 bought for C$30,000 and 1,000 bought later for C$50,000, commissions included. The average cost is C$80,000 divided by 2,000 units, or C$40 a unit. It sells 1,000 units for C$50,000, with no selling commission. The units sold cost C$40,000, so the books record a C$10,000 gain, not C$50,000 of income.

Schedule 6 shows the sale. The taxable capital gain is half the gain, C$5,000, and it carries to line 113 of Schedule 1. The 1,000 units left still cost C$40 each. A C$100 selling commission would cut the gain to C$9,900.

A loss sale and a rebuy

On December 20 the corporation sells 1,000 units of a fund for C$45,000. Their average cost is C$50,000, so the loss is C$5,000. On December 30 it buys 1,000 units of the same fund for C$45,000, and it still owns them on January 19, 30 days after the sale. The C$5,000 is held back, so the T2 cannot deduct it as an ordinary capital loss that year. The new units keep their cost of C$45,000. If the corporation later sells them and neither it nor anyone affiliated with it holds the fund for the next 30 days, the C$5,000 becomes a loss at that point, or earlier at one of the other times section 40(3.4) lists. The result can be the same if the person who controls the corporation made the C$45,000 purchase in a personal account.

Different for you?

• The account has years of trades nobody recorded: the opening cost of each holding has to be rebuilt from old statements before the gain on a sale can be worked out. See catching up on overdue books and get bookkeeping help.
• The accountant quoted an add-on and you cannot tell what it covers: compare the quote with the jobs in the first table and the questions above. If the answers do not add up, get bookkeeping help.
• You sold at a loss and bought the same holding back, or you or your spouse bought it personally: the loss is held back until the corporation and anyone affiliated with it stay out of the holding for 30 days, and tracking that, or how much is held back, can need a calculation. Get bookkeeping help.
• T2 years were missed: see catching up on unfiled corporate returns and get corporate tax help.
• The corporation trades often or buys on borrowed money: the gains may be business income, which changes the T2. See ACB in Canadian dollars and get corporate tax help.
• The holdings are in US dollars or abroad: see ACB in Canadian dollars and foreign property reporting.
• You are deciding whether to invest inside the corporation: see holding and investment corporations.
• The corporation pays dividends out of the account's income: see recording dividends in the books.
• The year just ended: see the year-end close checklist and year-end financial statements.
• The corporation is in Quebec or Alberta: neither has a corporation tax collection agreement with the CRA (CRA), and their provincial returns are not covered here. The books and federal schedules above still apply. See Quebec corporation accounting cost and get corporate tax help.