Adjusted cost base (ACB)

Introduction

When you sell a security, your capital gain or loss is normally your proceeds less your cost. The calculation can become complicated by additional purchases after the initial purchase, dividend re-investment, return of capital, stock splits, spin-offs and consolidations. For tax purposes you must track the ACB of each security that you own.

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.
• Distributions that are not reinvested have no effect on the cost base.
• Return of capital is subtracted from the cost base.

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 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 after the initial purchase

Note: This example, from CRA, does not include purchase commissions, which would be added to the ACB. Sales commissions are deducted from the proceeds.

Dividend re-investment

Note: This example, from CRA, does not include purchase commissions, which would be added to the ACB. Sales commissions are deducted from the proceeds.

Return of capital

The Adjusted Cost Base (ACB) is used in calculating capital gains or losses on the disposition of trust units held as capital property by a unitholder. The ACB of each trust unit is reduced by the amount of distributions received as a return of capital to date on that unit. When a Canadian taxpayer's ACB drops below zero during a taxation year, the negative amount is considered by CCRA (Revenue Canada ) 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.

ETF with Multiple Distributions

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

Suppose that an investor had purchased 100 shares of the "iShares Alternatives Completion Portfolio Builder Fund (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 ETF are as follows (click for larger image):

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 $25.80.98.

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

Further Reading

• Peter Ponzo aka Gummy. Adjusted Cost Base for Canadians.

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:

• Online
• Spreadsheet