Adjusted cost base

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Financial Planning
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Tax planning

Adjusted cost base (ACB) is a calculation used to determine the cost of an investment for tax purposes and is reported on Schedule 3 of your tax return. It is only relevant for assets held outside of registered accounts. When you sell an asset, your capital gain[1] or loss is normally your proceeds less your cost.[1] The calculation can become complicated by additional purchases after the initial purchase, dividend reinvestment, return of capital, stock splits, spin-offs and consolidations, which are discussed below.

The most common and usually the most simple situations involving ACB are additional purchases after the initial purchase, dividend re-investment, return of capital and stock splits. Spin-offs and consolidations are usually complicated. Sometimes the company will provide an example of how to calculate the ACB, although often with a disclaimer that the example is neither legal nor tax advice.

It is useful to keep the following rules in mind:

  • Purchasing charges are added to the cost base (e.g., [2][3]).
  • Reinvested distributions are added to the cost base.[4]
  • Return of capital is subtracted from the cost base (e.g., [5][3]).
  • Distributions that are not reinvested have no effect on the cost base (e.g., [6]) unless they contain return of capital.
  • Selling shares or units does not influence the ACB per share[3]
  • Stock spin offs will reduce the cost base. The amount of the reduction will usually be specified by the company doing the spin off (see below).
  • If you hold the security in more than one non-registered account, you are required to calculate the ACB across all of the accounts.
  • There are special rules for:
    • capital property that was owned before 1972, as capital gains were not taxed before 1972.[7]
    • repurchasing of an identical investment within 30 days (before or after) the sale of an investment. See: Superficial loss

Common situations

Simple purchase and sale

Suppose Ed purchases 200 shares of ABC Corp. for $20.32, in 2002 paying $9.95 in commissions. The commission is added to the ACB. His calculations are as follows:

No. of Shares Price Commission Total ACB ACB/Share
200 $20.32 $9.95 $4,073.95 $20.37

He sells the 200 shares for $35.23 in 2004, for proceeds of $7046.00, again with a $9.95 commission. Unlike the purchase commission, the sales commission is entered separately on the tax return.

The entry on Schedule 3[8] of Ed's 2004 tax return will look as follows, calculating the capital gain as: "Proceeds" minus "ACB" minus "Expenses":

Number Name of fund/corp. and class of shares (1)
Year of
acquisition 		(2)
Proceeds of disposition 		(3)
Adjusted cost base 		(4)
Outlays and expenses
(from dispositions) 		(5)
Gain (or loss)
(column 2 minus
columns 3 and 4)
200 ABC Corp. 2002 $7,046.00 $4,073.95 $9.95 $2,962.10

Additional purchases

Consider the case when you make additional purchases to an existing holding.[1] Please note that the Canadian rules differ from US rules in this situation. If you are using software or a website to track this situation, make sure it is configured correctly. Additional purchases after the initial purchase.jpg
Note: This example, from Canada Revenue Agency (CRA), does not include purchase commissions, which would be added to the ACB. Sales commissions are deducted from the proceeds.

Multiple sales

In 2010 Genevieve purchases 100 shares of XYZ at $20 each, plus $10 commission, so her total cost is $2010, and the ACB per share is $20.10. By 2016 she has received more than $200 in dividends, but she’s taken them in cash and spent them, so these dividends do not change the ABC.

She now decides to sell half her XYZ position, or 50 shares, now worth $30 each, for proceeds of $1500, with another $10 commission. Her capital gain will be "Proceeds" minus "ACB" minus "Expenses" = $1500 – 50*$20.10 – $10 = $485. What is the ACB on her remaining shares? Has it changed because of the sale? No! It’s still $20.10 per share.

In 2018 she decides to sell her remaining 50 shares at $28, so her capital gain that year is 50*$28 – 50*$20.10 – $10 = $385.

Dividend reinvestment

Main article: Dividend reinvestment plan

Some investors are enrolled in a dividend reinvestment plan which must be included in the calculation of the ACB.

Dividend re-investment.jpg
Note: This example[1], from CRA, does not include purchase commissions, which would be added to the ACB. Sales commissions are deducted from the proceeds.

Return of capital

Main article: Return of capital

There are a number of investments that provide returns that are not considered income. The ACB is used in calculating capital gains or losses on the disposition of trust units (including mutual funds) held as capital property by a unitholder[9]. The ACB of each trust unit is reduced by the amount of distributions received as a return of capital date on that unit.

The return of capital amount will be reported to you in Box 42, “Amount resulting in cost base adjustment” of your T3 tax slip[10][11].

When a Canadian taxpayer's ACB drops below zero during a taxation year, the negative amount is considered by CRA to be a capital gain.[12] Unitholders re-set their trust unit cost base to zero by paying capital gains tax on the negative cost base portion.

ROC.jpg

ETF with multiple distributions

The following example is taken from the iShares 2011 Distribution Tax Characteristics.[13]

Suppose that an investor had purchased 100 shares of the "iShares Alternatives Completion Portfolio Builder Fund (TSX: XAL)" in May, 2011 at an average unit price, after adding commissions, of $25.50 and a total ACB of $2550.00. The tax characteristics of the distributions of this exchange-traded fund (ETF) are as follows:

IsharesXAL.png

Recall that reinvested distributions are added to the ACB, return of capital is subtracted, and non-reinvested distributions have no effect. The new ACB of these units on Jan. 1, 2012 will therefore be, to the nearest penny, $2550.00+$33.53-$1.09-$1.46 , or $2580.98.

The investor's income tax return will also need to take into account the cash distributions and foreign tax paid.

Stock spin off

If a company elects to "spin off" part of its business to existing shareholders, the effect of the spin off is to reduce the cost base of the original stock. If the company is Canadian, it will provide information on its web site as to the amount of ACB reduction. However, if the spin off is from a non-Canadian stock, a Canadian shareholder may make an election to exclude amounts that would otherwise be considered a taxable foreign dividend. This election is discussed at CRA under Foreign spin-offs.

Tips and tricks

It is often simpler to work with the total cost at any particular time, adding and subtracting total adjustments as they occur. The per-share or per-unit ACB can then be calculated by dividing the total ACB at any given time by the number of shares or units held at that time.

Calculations

Some trusts provide calculators to help you calculate your ACB. You enter the buy/sell and the trade date and they combine their distribution information on return of capital to produce your ACB. To determine if a trust that you own does, Google the trust name and adjusted cost base.

For generic calculations, the following are available:

Notes

  1. ^ A reader has pointed out there's a bug in the spreadsheet, that does not impact the calculation of adjusted cost base. It displays return of capital as a capital gain in column J. Here's a fix for Row 5, the first row. Change the J5 formula to: =IF(C5<0,F5-ABS(C5)*I4,"")

See also

Further reading

References

  1. ^ a b c d Canada Revenue Agency, T4037 Capital gains, viewed February 12, 2021.
  2. ^ Canada Revenue Agency, How do you calculate and report capital gains when you sell or redeem units or shares?, viewed February 15, 2018
  3. ^ a b c John Heinzl, The ABCs of tracking your ACB, The Globe and Mail, updated March 25, 2017, viewed February 15, 2018
  4. ^ Canada Revenue Agency, Adjusted cost base - Identical properties, viewed February 8, 2018
  5. ^ Canada Revenue Agency, Tax Treatment of Mutual Funds for Individuals - How do you calculate your ACB?, viewed February 8, 2018
  6. ^ RBC Global Asset Management, Taxes and investing in mutual funds, November 2017, viewed February 15, 2018
  7. ^ Canada Revenue Agency, Supplementary Schedule for Dispositions of Capital Property Acquired Before 1972, viewed February 12, 2022.
  8. ^ 5000-S3 Schedule 3 - Capital Gains (or Losses)(for all), viewed February 12, 2022.
  9. ^ CRA, How do you calculate your ACB?, RC 4169, viewed February 12, 2022.
  10. ^ Jamie Golombek, Mutual Obligations – Tax Tips for Mutual Fund Investors, CIBC, December 2020, viewed February 12, 2022.
  11. ^ Canada Revenue Agency, T3 - Statement of Trust Income Allocations and Designations (slip), viewed February 12, 2022.
  12. ^ CRA, ACB - Identical properties, T4037, viewed February 12, 2022.
  13. ^ iShares, iShares CDN Funds - Final 2011 Distribution Characteristics, viewed February 12, 2022.

External links

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