With all the talk about bank failures and investor insurance, I’m hoping you can clarify a question my wife and I have. From what we understand, if the bank whose discount brokerage we use were to fail, we’d have some coverage because our stocks are insured, up to a point, through the Canadian Investor Protection Fund (CIPF).
But we can’t figure out why this insurance is even necessary. In theory, the bank/broker is acting only as an administrator or custodian for securities or cash that we own. If the securities and cash belong to us – and are not the bank’s property – they should not be affected by a bankruptcy of the bank or broker, correct?
So, if that is the case, in what scenario(s) would a customer’s securities or cash be lost and require the CIPF to make the customer whole?
In the event that one of its member firms becomes insolvent, the CIPF covers property – including cash, securities, futures contracts and segregated insurance funds – that were held on your behalf but which were not returned to you. The CIPF covers up to $1-million for all cash, margin and tax-free savings accounts combined, $1-million for all registered retirement accounts combined and $1-million for all registered education savings plans combined.
To minimize the risk of customers’ property being lost or unaccounted for when a broker becomes insolvent, the New Self-Regulatory Organization of Canada (New SRO) requires investment dealers to segregate clients’ securities from the firm’s own assets, Ilana Singer, vice-president and corporate secretary with CIPF, said in an e-mail.
“However, segregation is not required for all client property. For example, investment dealers are generally permitted to use the cash in the clients’ accounts. Therefore, there may still be some client property missing, even with segregation rules,” Ms. Singer said. “Another example of where missing property could arise is in the case of a failure by an investment dealer to follow the segregation rules.”
(New SRO is the temporary name of the organization created by the recent amalgamation of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). As part of that process, the MFDA Investor Protection Fund and Canadian Investor Protection Fund merged under the CIPF name.)
I wouldn’t lose sleep over any of this, for a couple of reasons. First, it’s rare for an investment dealer to go bust. In the 25 years through 2022, there were just eight CIPF member insolvencies. Second, even if a firm were to become insolvent, the odds of any customer being out more than $1-million are extremely small. In those eight previous cases, the combined payout in aggregate to all customers of the insolvent firms averaged just $2.27-million. Individual payouts to customers would have been a small fraction of that, and certainly well below the $1-million limit.
Does it make sense to ask for my shares in paper certificate form to avoid the possibility of them being lost in a bankruptcy of my bank-owned broker? What is involved in getting paper share certificates?
Brokers typically charge a fee of about $50 to have share certificate issued in your name through the company’s transfer agent. However, with electronic record-keeping supplanting paper, some companies no longer issue physical share certificates. In such cases, your shares would be held in “DRS” (direct registration system) form by the transfer agent.
“The benefit of keeping your shares in DRS book-entry is not having to worry about safeguarding your certificates and avoiding the potential cost to replace them,” Computershare, one of Canada’s largest transfer agents, says on its website.
However, unless you plan to enroll your shares in the company’s dividend reinvestment plan operated by its transfer agent, I don’t see a compelling reason to move them from your broker. As I said, it’s highly unlikely that a bank-owned investment dealer would go bust. But if your broker ever does get into trouble, you are well-protected by CIPF.
Can you explain the tax implications for unitholders of Summit Industrial Income Real Estate Investment Trust following its recent takeover?
In February, a joint venture between the Government of Singapore Investment Corp. and Dream Industrial REIT agreed to purchase Summit Industrial Income REIT for $23.50 per unit, or $5.9-billion.
The purchase price of $23.50 has two components: redemption proceeds of $7.15, and a special distribution of $16.35. The special distribution is estimated to consist of capital gains of $14.30 and ordinary income of $2.05.
The exact amount of capital gains (half of which are taxable) and ordinary income (which is fully taxed at your marginal rate) will be included on your T3 tax slip next year, so reporting them should be straightforward.
You will also have to calculate and report your own capital gain or loss from tendering your units. To do this, you would subtract the adjusted cost base of your units from the $7.15 redemption proceeds. If you get a negative number, this would indicate a capital loss (which will help to offset the capital gains in the special distribution). A positive number would indicate a capital gain. You may want to speak to a tax adviser to ensure you report the numbers correctly.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.