Understanding Trade Dates and Settlement Dates

For tax purposes, it’s important to understand the distinction between the trade date and the settlement date:

  • The trade date is the date on which you purchase or sell shares/units.
  • The settlement date is the date on which you begin to legally begin own the shares (in the case of purchase) or cease to own the shares (in the case of a sale).

For Canadian and U.S. equities, the settlement date is 3 business days after the trade date.  For example, if a trade is placed on Tuesday, January 20th, 2015 (the trade date), the settlement date would be 3 business days later: Friday, January 23rd, 2015:

Trade Date vs. Settlement Date

Holidays when the stock markets are closed do not count as business days.

For other kinds of investments, including foreign equities, options, mutual funds, money market funds, bonds, commodities, and GIC’s, the gap between the trade and settlement dates can vary (the settlement date is usually between 0 and 3 days following the trade date).  The settlement date should be provided by your bank or brokerage on your trade confirmation notice (or a similar document) so it’s always best to check there.

Why Is the Settlement Date Important?

When selling a security towards the end of December, it’s possible for the transaction to settle in the next year.  This means that any capital gain or loss incurred may apply to the next year even if the trade occurs in the current year.  Deferring a sale into the next year can be advantageous in the case where a capital gain occurs, or disadvantageous for a sale involving a capital loss.  In any case, the capital gain or loss must be reported in the correct year.

Determining the final date on which stock trades can occur and settle before the end of the year can be tricky.  Markets in Canada are closed on Christmas Day and Boxing Day, so these days do not count for the 3-day period between the trade and settlement dates (see the TSX holiday calendar).  Also, holiday schedules can be different between the U.S. and Canada as Boxing Day isn’t a holiday in the U.S.

For 2014, for Canadian equities, the last trading date resulting in settlement in 2014 was Wednesday, December 24th, 2014 (December 25th and 26th were holidays).  Any trade placed on Wednesday, December 24th would settle on Wednesday, December 31st.  Any trade placed after this date would settle in 2015.

For 2014, for U.S. equities, the last trading date resulting in settlement in 2014 was Friday, December 26th, 2014 (only December 25th is a holiday since Boxing day isn’t observed in the U.S.).  Any trade placed on Friday, December 26th, 2014 would settle on Wednesday, December 31st, 2014.  Any trade placed after this date would settle in 2015.

For 2015, for Canadian equities, the last trading date resulting in settlement in 2015 will be Thursday, December 24th, 2015.

For 2015, for U.S. equities, the last trading date resulting in settlement in 2015 will be Monday, December 28th, 2015.

The Settlement Date and Collecting Dividends

In order to collect a dividend, the shares must be owned on the record date.  Note that the record date is distinct from the payment date.  Typically the record date can be between a few days and a month before the payment date.

Another related date is the ex-dividend date, which occurs 2 business days before the record date.  The ex-dividend date can be used to determine whether you’ll receive a dividend by comparing it to the trade date.  If you purchase shares before the ex-dividend date, you’ll receive the dividend.  On the other hand, if you purchase shares on or after the ex-dividend date, you won’t receive that dividend.  Similarly, if you sell shares before the ex-dividend date, you won’t receive the dividend.

The Settlement Date on AdjustedCostBase.ca

When using AdjustedCostBase.ca to track your adjusted cost base and capital gains, your transactions should always use the settlement date for buy and sell transactions.  This ensures that capital gains and losses will appear in the correct years.

Also, any transactions involving distributions (such as Return of Capital, Capital Gains Dividends, and Reinvested Capital Gains Distributions) should use the record date that applies for the distribution.  Again, this ensures that any applicable capital gains and losses are reported for the correct year.  Even more importantly, when using per share amounts for a distribution, using the record date is necessary to ensure that the distribution is applied to the correct number of shares.

We can illustrate this with an example.  Suppose you purchased 400 units of VVV on the Toronto Stock Exchange for $100/unit traded on Thursday, January 2nd, 2014, with a commission of $10.  Then trading on Monday, December 29th, you sell all 400 units for $80/unit with a commission of $10.

Before entering the transactions into AdjustedCostBase.ca, the trade dates should be converted into settlement dates.  Since the settlement date for Canadian equities occurs 3 business days after the trade date, the transaction details are as follows:

  • Buy 400 units of VVV for $100/unit with a $10 commission, settling on Tuesday, January 7th, 2014.
  • Sell 400 units of VVV for $80/unit with a $10 commission, settling on Friday, January 2nd, 2015.

The sale transaction’s settlement date occurs 4 days after the trade date because January 1st was a holiday.  After entering these transactions into AdjustedCostBase.ca you should see the following:

Transactions with a Settlement Date at the End of the Year

Since the settlement date of the sell transaction is in 2015, the capital loss cannot be claimed for 2014 (even though the trade happened in 2014).

As explained above, another situation where special attention needs to be paid is when dividends or distributions occur around the same time as a purchase or sale.  Let’s look at the following example:

  • Purchase 100 units of ACB traded on Wednesday, December 24th, 2014 for $100/unit and a $10 commission.
  • A dividend is declared for ACB with a record date Wednesday, December 31st, 2014 for an amount of $0.50/unit, which is entirely return of capital.

The trade date needs to be converted into a settlement date.  In this particular case, the settlement date is Wednesday, December 31st, 2014 (3 business days later).  These transactions appear on AdjustedCostBase.ca as follows:

Transactions for ACB on AdjustedCostBase.ca

In this case the shares are owned starting December 31st, so the return of capital does indeed apply.  Note that since the settlement date is the same as the record date in this case, the order of the transactions must be correctly set.

Note that the default date for new transactions on AdjustedCostBase.ca is today’s date.  If you’re in the habit of inputting transactions on the very same day they occur, you should remember to adjust the date when necessary so that it corresponds to the settlement date.

There are many cases where you can get away with being sloppy and mix up the settlement and trade dates.  When trades don’t occur at the end of December and when trades don’t coincide with dividend record dates or ex-dividend dates, the transaction dates being off by a few days without any noticeable affect.  But this can lead to problems down the road.  For example, suppose you enter a purchase transaction without being careful about the date.  Then later on you enter a distribution transaction as a per share amount with a date around the same time as the purchase transaction.  If you’ve forgotten that you need to carefully check the date of the purchase transaction, you may end up incorrectly applying the distribution to too many or too few units.

2 thoughts on “Understanding Trade Dates and Settlement Dates

  1. Tom

    Hi – I have been tracking ACB for US$Cash in my US$stock account. While I understand the necessity of using settlement date over transaction date for records, but I am not sure which date to use for the C$/US$ exchange rate. Intuitively I think I should use the transaction date exchange rate. Is this correct.

  2. AdjustedCostBase.ca Post author

    Tom,

    I’m not aware of any source that confirms the CRA’s stance on this, but it makes more sense to me to to use the exchange rate on the purchase/trade date as opposed to the settlement date. The share price for a transaction (with or without foreign currency involved) is of course based on the market price on the trade date, not the settlement date, so it seems logical to extend this to the foreign exchange rate. And in cases where Canadian dollars are actually converted when purchasing stocks, the actual exchange rate is based on the exchange value on the trade date.

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