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Adjusted cost base (ACB) is used to calculate capital gains and losses for tax purposes in Canada. When it comes to taxes on your investment gains or losses, the number you’re really looking for is your ACB.
Your ACB also includes commissions and fees, and allows you to determine the gains and losses from multiple sales of one investment. Let’s look at a few examples of calculating your ACB.
We’ll start with a simple example. Let’s say you buy 100 shares of Company X at $20 per share. To make the purchase, you also paid your broker a $10 commission. Here your ACB would be $2,000 (100 x $20), plus your $10 commission for $2010. Now let’s say later you decide to sell your 100 shares for $30 each. You’re again charged a $10 commission. For the sale you receive $3,000 (100 x $30), minus the $10 commission for a total of $2,990. Your capital gain here would be $2,990 minus $2,010, or $880.
What if you are purchasing or selling your shares in multiple transactions? How does this affect your ACB? Let’s find out.
You purchase 100 shares at $20 each and are again charged a $10 commission. Later you purchase 100 more shares in the same company, but they now cost $30 each. You once again pay the $10 commission. Here your first purchase would cost $2010. Your second purchase would cost $3010. Your total ACB is $5020. Your ACB per share is calculated by dividing your total costs, $5020 by your total numbers of shares (5020/200). This comes out to $25.10. This is the number you would use to determine your capital gain or loss when selling part of or all your shares.
If you sold all 200 of your shares at $40 per share your capital gain would be $8,000 (200 x $40), minus your $10 commission, minus $5020, for $2970.
What if you only sold 50 of your 200 shares at $40 per share? In this example to determine your capital gain you would take $2,000 (50 x $40) minus your $10 commission, and minus $1255 (50 x $25.10) to give you $735. If you sell some of your shares your capital gain is based on the ACB per share.
Whenever you’re reporting capital gains or losses on your taxes make sure you are correctly calculating your ACB and reporting the correct amounts. Always check your figures with an accountant, a tax professional or your adviser.