Clients will occasionally ask: Why isn’t my investment doing well? 

Then I ask which one they’re concerned about, and what they’re basing that determination on. 

They say: Well, that’s what the statement says. That’s what I’m looking at! 

But statements can be misleading. Let me explain why.

We’ll begin with industry jargon 

Let’s first deal with some industry jargon. You may have heard of adjusted cost of your investment, or something called book valueThese two terms mean the same thing. 

Market value is what your investment is worth today. It is not the same as book value and/or cost. 

What typically happens in these cases is that an investor is comparing their adjusted cost to market value, as reported on their statement. They look at the difference between those two, and say that that is the performance they are generating. 

In other words, they’re thinking market value, less my book value, is my percentage return. 

But! Book value, and what’s called net invested – essentially the money you put in – are not the same thing. 

Your percentage return is what you put in, versus your market value. 

A deeper look at book value 

Let’s figure it out – what is book value? If it isn’t what you invested, then what is it? 

This is important because book value, and adjusted cost base, are reported on your statement. Plus market value. 

So where is your net invested? 

It usually doesn’t show up at all!

Then what is book value all about? Book value, or adjusted cost base, equals net invested plus income distributions. Let’s talk about those income distributions!

Income distributions change everything 

The investment that you bought, say a mutual fund, owns a number of types of investments. Those investments generate interest if they’re bonds. They might pay dividend income, if they’re stocks, and if sold at a profit they will generate capital gains. If you own that investment in a taxable account? The CRA says: Give me my tax money.

This income will have to be reported and will show up on one of those lovely T-slips at the end of the year even if you reinvested the income rather than took it in cash. But you don’t want to pay tax on that return twice! 

So let’s assume the investment unit value that you bought was $10 per share, and you got an income distribution of $1 per share. If at the end of the year the unit value was $11 dollars per share, you reinvested that $1 – you didn’t take it out. You’re going to pay tax on that $1. So your book value is now your net invested plus this one dollar of income. Now your book value is 11 dollars. It’s not what you originally invested! It’s what you invested plus any income distributions.

Tax implications

Now, one day you might sell this investment.

You invested at 10 dollars, you got a 1 dollar income distribution on which you paid tax, it’s worth 11 dollars and you sell it. You’ve made 10 percent! Pretty good! 

But you shouldn’t be made to pay tax on that $1 again, so the CRA calculates your capital gain on this investment as the market value minus the book value, which was 10 dollars plus your income distribution: $11. So you have zero capital gain. Hooray!

Bet you never thought you’d be happy about not having a capital gain on an investment! But you should be happy – you don’t want to pay tax on this income twice. 

RRSP and TFSA statements

The next question I hear is: Why does this get reported on my RRSP or TFSA statement, when taxes don’t come into play? The distributions are not taxable.

The fact is, financial institutions usually use one system to report all account information. What’s useful for a tax account may not be as useful for a tax-free account but everything gets reported the same way. 

Moral of the story 

The next time you’re thinking of judging the quality of your investment return by comparing cost base to market value? Don’t do it – you’ll be missing part of the puzzle!

This information is of a general nature and should not be considered professional advice. Its accuracy or completeness is not guaranteed and Queensbury Strategies Inc. assumes no responsibility or liability.