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Understanding adjusted cost base, and calculating your capital gains

By Raymond Letendre, CPA, CGA, CFP® 31 October 2022 7 min read

As an investor, you probably know there can be a gain or loss for tax purposes upon the sale or deemed disposition of capital property. Unless held in a registered tax-sheltered account such as an RRSP or TFSA, the Canada Revenue Agency requires that taxes be paid on the gains realized from the sale of capital assets such as investments in real estate, stocks, bonds, mutual funds, and exchange-traded funds. In order to report the proper gain for tax purposes, you first need to understand your adjusted cost base, or ACB. Once this is identified, calculating your capital gain is relatively straightforward. In this article, we explain how to track the ACB of investments, and calculate your capital gains.

 

Calculating capital gains

In a simple example, the resulting gains from the disposition of an asset are taxed as the difference between the proceeds of the sale and the cost of the asset. For instance, if 100 shares are purchased for a cost of $20 per share and subsequently sold for proceeds of $30 per share, the capital gain is the difference between the cost of $2,000 and the sale proceeds of $3,000. The resulting capital gain is identified as $10 per share for a total gain of $1,000. This amount is reported for tax purposes, and 50% of the gain (the taxable capital gain) is included as income from the sale of the investment.

In the absence of commissions or other fees, the initial cost is simply the amount paid for the investment. When expenses such as commissions, legal fees, and other such transaction costs are incurred to purchase the investment, they can be added to the cost of acquiring the shares. Similarly, the outlays and expenses incurred to sell an investment can be subtracted in calculating the capital gain. Accordingly, the total gain is reduced by the impact of the costs involved. In a simple scenario, the approach to determining the capital gain on the sale of a capital asset is:

Source: ATB Wealth


For many investors, acquiring savings takes place over time, such as pre-authorized contribution plans. This results in multiple transactions by the investor, accumulating investments at different prices and different times. In a scenario where a number of shares are purchased over time at different prices, and a subsequent sale takes place for a portion of the shares acquired, what is the appropriate cost to use when determining the gain? Can you simply apply a first-bought, first-sold approach? The short answer is no. The adjusted cost base must generally be calculated using a running total or average cost approach.

 

Calculating the adjusted cost base (ACB)

Tracking the cost on a number of different securities over a period of time can be complex for even the sophisticated investor. One of the benefits of investing in pooled investment like a mutual fund means that the record keeping is taken care of for you for investment activity within the fund. However, you will still need to calculate the ACB for your mutual fund units.

Tip: A T5008 slip provided on your investment account may include proceeds of disposition as well as cost or book value information. That said, the cost amount may or may not reflect your ACB for the purpose of determining the gain or loss from the disposition of the security. It is your responsibility to ensure the accuracy of this information.

Tracking the ACB of your investments can be simplified with good record keeping. Your investment statements and confirmations should provide all of the information required to maintain the required information for reporting. An accountant or bookkeeper can also help track individual securities and related transactions.

 

ACB calculation example

Ingrid receives a bonus from her employer each year and uses a portion to invest in a mutual fund. She has opted to receive cash distributions (more on that below). Ingrid occasionally makes a withdrawal for her lifestyle expenses as needed. Ingrid is diligent in record keeping and maintains the following transaction activity.

 

Transaction

Price per unit

Total

Year 1

Purchased 100 units

$30.00

$3,000

Year 2

Purchased 95 units

$32.10

$3,049.50

Year 3

Purchased 60 units

$36.92

$2,215.20

Year 4

Sold 20 units

$33.96

$679.20

Year 5

Purchased 110 units

$40.07

$4,407.70

Year 6

Sold 22 units

$38.29

$842.38

What gain does Ingrid need to report for her sales in years four and six? The answer resides in first determining the appropriate cost of the units she sold. By keeping track of her transactions throughout the year, Ingrid can more easily determine the appropriate amounts to include when completing her tax return. 

First, we can establish the cost of units after year three as simply the total accumulated cost of $8,264.70, or $32.41 per unit when divided by 255 total accumulated units. The cumulative ACB per share is then identified as the cost base for the subsequent sale of those units. 

Next, when Ingrid sells a portion of her units in year four at a price of $33.96 per unit, we know that this price is higher than what she has acquired some units for, and lower than others. Does Ingrid report a gain, a loss, or both? As described above, we know that the accumulated cost of what she has purchased is $32.41 per unit. For the 20 units that were sold this amounts to a cost of $648.20. The sale of these units results in proceeds of $679.20 for a gain on sale of $31, or $1.55 per unit.

Acquiring additional units in year five adds to her cost, and continuing the process, we can identify the gain in year six as $75.68, illustrated in the table below.

 

Price per share

Investment

Sale proceeds

Shares

Share balance

Cost adjustment1

ACB (cumulative)

ACB per share

Gain / (loss) on sale

Year 1

$30.00

$3,000

 

100

100

$3,000

$3,000

$30.00

 

Year 2

$32.10

$3,049.50

 

95

195

$3,049.50

$6,049.50

$31.02

 

Year 3

$36.92

$2,215.20

 

60

255

$2,215.20

$8,264.70

$32.41

 

Year 4

$33.96

 

($679.20)

(20)

235

($648.20)

$7,616.50

$32.41

$31.00

Year 5

$40.07

$4,407.70

 

110

345

$4,407.70

$12,024.20

$34.85

 

Year 6

$38.29

 

($842.38)

(22)

323

($766.70)

$11,257.50

$34.85

$75.68

1 # shares x price for a purchase transaction / # shares x ACB per share for a sale transaction

The impact of distributions

In addition to changes in unit price, many investments such as stocks and mutual funds will make regular income distributions that an investor can choose to take in cash, or reinvest back into the stock or fund. For investments that pay regular distributions and are reinvested, the ACB calculation will also need to consider the distribution. Whether taken as cash, or reinvested, distributions represent income to the investor and are taxed when paid in non-registered accounts. With income distributions presumed to be an amount paid and taxed, reinvestment is considered to be an additional contribution, thus increasing the total cost of the investment. 

Tip: This means that the book value shown on your statement can often be different than the amount you have actually invested yourself. See our article on why you shouldn’t use book value to evaluate your investment performance.

Investing in mutual fund units will generate taxable income through distributions of income from the portfolio and capital gains (or losses) when units of the mutual fund are sold or otherwise considered disposed of by the investor. For a more detailed discussion of the tax treatment of mutual fund investments including distributions and the sale of mutual fund units, please refer to our Mutual Fund Trust Taxation Guide.


Planning tips

Investing, performance, and taxation are all important components of any financial plan. An integrated approach that includes discussion with your investment, tax and other professional advisors is encouraged in order to determine strategies that are appropriate for you. When developing your plan, consider the points below as they might apply to your situation:

  • Investment returns can generally comprise of interest, dividends, realized gains, and unrealized/deferred gains. Review your investment portfolio asset allocation with your advisor to determine the appropriate strategy for your goals.
  • If you hold the same security in multiple non-registered accounts, the ACB calculation must consider all non-registered accounts.
  • Taxable capital gains can normally be reduced by other capital losses. If you have capital losses that exceed capital gains in the current year, you can carry back the losses to any of the three preceding taxation years to be deducted against capital gains in those years. Capital losses can also be carried forward indefinitely and applied to offset future capital gains.
  • When claiming capital losses, consideration should also be given to the superficial loss rules. Generally speaking, a capital loss is defined as superficial if, during the 30 days on either side of the date of sale, the taxpayer (or an affiliated person) purchases the same property or one deemed to be identical. If this is the case, the loss cannot be used to offset capital gains, but rather it will be added to the adjusted cost base of the substituted property. 
  • Investments in an RRSP or RRIF account are tax-deferred. i.e. Taxes are only paid when amounts are withdrawn from the account. Investment income earned in a TFSA is not taxable, nor are withdrawals. To the extent you have available contribution room, consider making a contribution to an RRSP, TFSA, or both. Speak to your advisor to determine strategies appropriate for your situation.

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