Calculating your adjusted cost base (ACB) is necessary to determine the true cost of your investments for capital gains and losses. If you want a good idea of what kind of returns you are really getting, you need to figure out your adjusted cost base.
And, perhaps more importantly, the CRA requires this calculation to be used for income taxes in relation to capital gains and losses.
If you want to make sure you stay in the good books with the CRA, you need to make sure you understand how to perform this calculation.
What Is an Adjusted Cost Base
An adjusted cost base, sometimes referred to as the adjusted cost basis, is used to measure the true cost of an asset, in turn making it possible to calculate the capital gain or loss for income tax purposes, when the asset is sold.
The ACB includes the purchase price of an investment, as well as any additional expenses that are incurred to acquire and own the asset.
When the asset is sold, the capital gain is determined by subtracting the adjusted cost base from the sale price of the asset.
Most non-registered investments require an adjusted cost base calculation. This could include a rental property owned by an individual investor, commercial real estate, or the sale of securities such as stocks and bonds.
Registered investments, such as funds held inside of an RRSP or TFSA account, do not require an ACB calculation as they are tax sheltered, and don’t incur capital gains.
The Adjusted Cost Base in Real Estate
The ACB can apply to any asset, including real estate. Let’s say a company purchases a commercial property for $500,000, and they make improvements to the property of $200,000. The ACB of the property would be $700,000.
This is the figure that would be used to calculate the capital gain (or loss) when the property is eventually sold.
If an individual were to purchase a rental property, they would also need to consider the adjusted cost base in order to determine the capital gain or loss when they sell.
It’s important to note that not all expenses can be added to the adjusted cost base. For example, costs that are incurred to maintain the ongoing operation of a building, such heating and electricity, are not considered part of the adjusted cost base.
The Adjusted Cost Base of Securities
In addition to real estate, the Canada Revenue Agency requires that capital gains be paid on equity investments, such as stocks, mutual funds and ETFs.
Even if you seek out a tax professional for advice (highly recommended), it’s important to understand how these capital gains are calculated on your investments, using the adjusted cost base.
To illustrate, let’s look at a simple scenario, using the purchase and sale of company shares.
How To Calculate Adjusted Cost Base
The adjusted cost base is calculated by adding in the price you paid to purchase all of your investments into a certain stock or mutual fund.
When you consider your ACB, you also need to make sure that you are including any reinvested distributions, as well as any commissions or fees incurred to purchase that stock or mutual fund.
You want to make sure that all of your costs are represented. Your total cost is then divided by the total number of shares or units you own.
For example, say you buy 500 shares in a company for $15 each. Later, the stock price falls so you decide to buy 200 more shares in that company at $12 each.
You also have to pay a commission of $20 for each transaction.
- 500 x $15 = $7,500
- 200 x $12 = $2,400
- 2 x $20 =$40
- $7,500 + $2,400 + $40 = $9,940
The total cost of your investment is $9,940. Now you divide that amount by the 700 shares that you own. The result is an ACB of $14.20 per share
In this example, your adjusted cost base is $14.20. Capital gains or capital losses are then simply calculated as the difference between the ACB and the sale price minus commissions.
Continuing with the example above, let’s see what would happen if you were to sell 100 shares for $15:
- Sell 100 x $15 ($1,500) – $20 for the commission = $1,480
- ACB 100 x $14.20 = $1,420
As you can see, you have a capital gain of $60. That is the amount on which the CRA will tax you.
Using the ACB to Calculate a Capital Loss
But what if you end up selling for less than the ACB of $14.20 a share? Below, you can see the result if you were to sell 100 shares for $13:
- Sell 100 x $13 ($1,300) – $20 for the commission = $1,280
- ACB 100 x $14.20 = $1,420
Now you have a capital loss of $140. You can use that loss to offset capital gains you might have, lowering your investment income for tax purposes.
The Adjusted Cost Base and Foreign Investments
If you’re using the ACB to calculate the capital gain on an investment held in foreign currency, you must convert the figures to Canadian dollars in order to determine your capital gain.
Keep in mind, you cannot use the same exchange rate to convert the different components of the transaction. For example, to convert the purchase and sale prices of shares in a foreign company, you must use the exchange rate from their respective trade dates.
When converting the ACB amount, you must use the exchange rate on the day the investment was acquired.
Reduce Your Fees to Improve Your ACB
Lowering the cost of commissions is a good way to improve your adjusted cost base, which will help to improve the eventual yield on a security when it is sold.
Using a discount online broker will help, as this tends to be the most cost efficient way to purchase securities.
Your Best Bet for Low Fee Trading
While there are many discount brokers to choose from, my top choice for 2018 is Questrade, and low fees are a big reason why.
For starters, their basic trading fee starts at $4.95, which is the lowest in the industry. Questrade also offers no-fees on the purchase of ETFs (exchange traded funds).
(It’s also worth noting that you can get $50 to go toward paying commissions when using our promo code at Questrade.)
While there are a couple of online brokers advertising no-fee ETFs, their fund selection is limited and they require that you purchase ETF units in larger quantities, i.e. blocks of 100.
Calculating your adjusted cost base is not only mandated by the CRA, it’s also useful for tracking your investments and understanding your real investment returns.
When you know the adjusted cost base per share, it allows you to make far more meaningful comparisons to the current prices in the market.