Adjusted cost base

From finiki
Jump to: navigation, search

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.[2] 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.
  • Reinvested distributions are added to the cost base.
  • Return of capital is subtracted from the cost base.
  • Distributions that are not reinvested have no effect on the cost base unless they contain return of capital.
  • 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.[3]
    • 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[4] 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.

Dividend reinvestment

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 held as capital property by a unitholder[5]. 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[6][7]. 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. 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.[8]

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 (click for larger image):

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. 1.0 1.1 1.2 Canada Revenue Agency, Adjusted cost base (ACB), Viewed July 3, 2009
  2. Globe and Mail, April 15, 2003. Calculating Your Adjusted Cost Base, Viewed July 3, 2009.
  3. Canada Revenue Agency, T1105 Supplementary Schedule for Dispositions of Capital Property Acquired Before 1972, viewed May 23, 2012
  4. 5000-S3 - T1 General 2013 - Schedule 3 - Capital Gains (or Losses) in 2013 - Common to all, viewed April 15, 2014.
  5. Canetic Resources Trust, Adjusted Cost Base, Viewed July 3, 2009.
  6. Jamie Golombek, Mutual Obligations – Tax Tips for Mutual Fund Investors, April 28, 2011. Viewed February 13, 2014.
  7. Canada Revenue Agency, T3 - Statement of Trust Income Allocations and Designations (slip), viewed February 13, 2014.
  8. iShares, iShares CDN Funds - Final 2011 Distribution Characteristics, viewed May 19, 2012.

External links