The adjusted cost base (ACB) is a critical concept for Canadian investors to understand. It allows you to accurately calculate capital gains or capital losses when you sell investments held in non-registered accounts. Proper ACB tracking and reporting are not only required by the Canada Revenue Agency (CRA) but also essential for minimizing your tax liability as an investor.
What Is Adjusted Cost Base (ACB)?
The Adjusted Cost Base (ACB) is simply defined by the Canada Revenue Agency as the original purchase price plus any expenses to acquire and improve a property, such as commissions, brokerage fees, legal charges, and more.
Many investors mistakenly believe their ACB is simply the amount they paid for an investment. However, the ACB is a dynamic figure that changes over time due to various transactions and events.
The adjusted cost base serves as the baseline for calculating capital gains or losses when you sell an investment. For investments held in non-registered accounts, capital gains are taxable, while capital losses can be used to offset gains. Investors can reduce capital gains and minimize taxes owed by maximizing this cost.
Conversely, an inaccurately low ACB will lead to higher capital gains and excess taxes. This is why proper ACB is important.
What Assets Require ACB Tracking?
Not all investments require ACB tracking. ACB tracking is essential for all investments held in non-registered accounts, including:
- Stocks and shares
- Bonds and fixed-income securities
- Mutual funds and ETFs
- Segregated funds
- Income trusts
- Partnership interests
- Real estate (investment properties)
- Listed personal property (art, jewelry, collectibles)
Assets held in registered accounts like RRSPs, TFSAs, or RRIFs do not require ACB tracking since they are tax-sheltered.
How Is Adjusted Cost Base Calculated?
The ACB calculation method varies depending on the type of asset, but generally includes the original purchase price plus acquisition costs. Let’s examine the specific steps to determine ACB for key asset types:
The ACB rules for identical properties
The Income Tax Act Section 47 defines identical properties as securities that are exactly the same in all respects, such as shares of the same class from the same corporation or units of the same mutual fund trust.
Since the per-unit cost often varies with multiple purchases of the same security, the Weighted Average Cost Method is used to calculate the adjusted cost base. This involves:
- Adding up the total cost of all purchases, including commissions
- Dividing this total cost by the total number of units purchased
Example calculation of how multiple purchases affect ACB
- If you buy 1,000 shares of company A at $10 per share plus a $50 commission, your original ACB is $10,050 ($10 x 1,000 + $50).
- If you later buy 500 shares of company B at $12 per share with a $20 commission, you must recalculate the ACB for all 1,500 shares owned:
- 1,000 shares at $10 per share = $10,000
- 500 shares at $12 per share = $6,000
- Total purchase costs = $16,000
- Add commissions: $50 + $20 = $70
- Total ACB = $16,070
- ACB per share = Total / 1,500 shares = $10.71
- If you later sell 100 shares at $15 per unit, your capital gain would be: (15.00 – 10.71) ×100 = $429.00.
When identical property is held in multiple non-registered accounts under the same ownership, the overall ACB must be calculated across all accounts on an aggregate basis based on total shares held. For example, if you own 400 shares of company XYZ in one account and 200 in another taxable account, your total ACB would be based on 600 shares in aggregate.
Certain securities receive special treatment outside the identical property rules. Employee stock options subject to benefit deferral maintain individual ACB tracking. Similarly, employer shares received through deferred profit-sharing plan withdrawals retain separate cost basis calculations. Bonds and debentures follow identical property rules when issued by the same debtor with identical attached rights, with averaging based on principal amounts rather than market values.
ACB for bonds and debentures
For interest-paying debt instruments like bonds and debentures, the CRA has special ACB calculation guidelines:
- The ACB excludes accrued interest after the last coupon payment
- For identical bonds, ACB must be tracked separately but averaged based on principal value (excluding premiums/discounts)
In particular, any bond premium or discount to face value does NOT factor into the adjusted cost base. This affects taxpayers seeking an accurate ACB for bond holdings.
ACB for real estate
For real estate, ACB consists of the original purchase price plus any capital improvements or investments that increase the property value, such as renovations or additions. Ongoing maintenance and operating costs are not included in ACB. Legal fees, property transfer taxes, and commissions are added to ACB.
ACB constitutes the purchase price for other capital assets plus directly related costs like installation, legal fees, freight, and specific upgrades that increase functionality or value.
When you eventually sell an investment asset, your capital gain or loss is calculated as:
Capital Gain/Loss = Sale Proceeds – Adjusted Cost Base
When identical property is held in multiple non-registered accounts under the same ownership, the overall ACB must be calculated across all accounts on an aggregate basis based on total shares held.
ACB for fixed assets
For fixed assets like machinery, equipment, and vehicles used in business operations, taxpayers should factor:
- Original asset invoice cost
- Freight, customs, excise, and legal fees
- Installation charges
- Costs to upgrade and make the asset operational
Much like real estate assets, taxpayers must differentiate between capitalizable upgrades/enhancements and regular operating expenses. Only major expenses that extend fixed asset lifespan get added to the ACB.
What Transactions Can Adjust ACB?
In certain cases, downward or upward adjustments must be made to ACB after a property is acquired:
Return of capital (ROC)
When mutual funds or ETFs make distributions that are classified as return of capital (ROC), this portion is considered a return of the investor’s original capital. Any ROC distribution must be deducted from the units’ ACB, reducing future capital gains.
Reinvested capital gains distributions
If mutual fund distributions are automatically reinvested to purchase new units, this increases the ACB. The amount reinvested that is included in taxable income should be added to the total ACB.
For example:
- Original Investment: 1200 units at $10 per unit = $12,000 ACB
- Distribution $700: $500 reinvested to buy 20 units and $200 cash
- The $500 reinvested was reported as taxable income, so ACB increases by $500.
New ACB = $12,000 + $500 reinvestment = $12,500
Transferring between accounts
The ACB remains unchanged when transferring investments directly between accounts of the same legal ownership. Changing from personal to joint ownership has tax implications. The transfer triggers capital gains based on fair market value, even without a cash sale. The recipient’s ACB equals the fair market value on the transfer date, establishing a new cost basis.
Inheritance and gifts
For inter-spousal transfers upon death or gift, the inheritor assumes the same ACB. For transfers from other parties, ACB is deemed to be the fair market value on the transfer date.
Special elections
Spousal transfers, superficial loss rules, and the 1994 capital gains exemption can all trigger ACB adjustments in specific cases.
How Do You Calculate ACB for Foreign Investments?
When selling foreign investments, you must convert proceeds and ACB to Canadian dollars using the exchange rate on each transaction date.
For example, if you bought U.S. stocks for USD 1,000 when the exchange rate was 1.3, your ACB would be CAD 1,300 (1,000 x 1.3).
If you later sold for USD 900 when the exchange rate was 1.2, you would have a capital loss of CAD 220 (1,080 – 1,300). To avoid errors, use the correct historical exchange rates when initially recording ACB and proceeds.
The bottom line
This guide has provided an overview of how adjusted cost base works and why it matters for Canadian investors with taxable accounts. The key takeaways are:
- ACB is vital for determining capital gains/losses for tax purposes
- Multiple purchases require ACB adjustments
- Certain transactions can increase or decrease ACB over time
- Accurate records and calculations are essential
Consulting with a qualified tax professional to get personalized guidance based on your circumstances and help ensure your ACB calculations comply with current tax regulations.
FAQs about Adjusted Cost Base
What happens if I don't track ACB correctly?
Inaccurate ACB tracking can lead to incorrectly reporting capital gains or losses to the CRA. This could trigger reassessments, penalties, interest charges, and excess taxes owed.
How is ACB different from the purchase price?
While purchase price is what you originally paid, ACB accounts for additional costs over time like broker fees and property upgrades.
Do I need to track ACB for investments in my TFSA or RRSP?
No, since TFSA, RRSP, and other registered accounts are sheltered from tax, there is no need to track ACB. ACB is only relevant for capital gains/losses in non-registered accounts.
What records do I need to keep for ACB tracking?
You should keep all broker statements, trade confirmations, tax slips, distribution notices, and any other documentation that supports your original costs and any adjustments.
Can my brokerage provide my ACB calculations?
Unfortunately, no. While your brokerage can provide transaction histories, it is your responsibility to adjust for distributions, return of capital, and other factors to determine the accurate ACB.
