As exciting as I tried to make calculating the adjusted cost base (ACB), I was worried that last week's column would still put a few readers to sleep.
And it probably did. But it also piqued the interest of others, judging by the e-mails I received.
Today, I'll tackle some of the questions readers sent in.
With my tax software, when I enter our capital gains and losses, there is a column for the year of purchase. But if we built a position in a stock over a few years then what do I put in for the date? Or does the Canada Revenue Agency even think it is important?
"It doesn't really matter," said Justin Bender, portfolio manager with PWL Capital in Toronto. "I used to prepare tax returns for our clients, and I would always just put in the year of the first purchase."
I double-checked this with the CRA and an agent confirmed that entering the year of the first purchase is indeed acceptable. The important thing is to make sure your ACB and capital gain or loss are accurate.
I've always been told that the CRA requires the "first in, first out" rule when tracking the ACB of securities that are purchased in stages and at different prices. Is this the case?
No. The first-in, first-out rule – which assumes that shares acquired first are also sold first – is one of several accounting methods accepted by the U.S. Internal Revenue Service. However, the CRA requires that investors use the average cost of securities (including commissions) for calculating capital gains.
What's more, if you hold the same security in two or more taxable accounts, you must calculate the adjusted cost base per share, or average cost, across all accounts.
"So if you had an exchange-traded fund in one brokerage and the same ETF in another brokerage you should only have one adjusted cost base per share," Mr. Bender said.
With return of capital (ROC), is it possible for the cumulative total to exceed the original cost? If so, is your ACB negative or set at zero?
As mentioned last week, ROC is not taxable but is instead deducted from the ACB of a security. This gives rise to a larger capital gain, or smaller capital loss, when the investment is ultimately sold.
Theoretically, if you receive enough ROC distributions, the ACB could fall all the way to zero. Once that happens, however, any further ROC distributions are treated as capital gains in the current year and no longer deducted from the ACB. So the ACB cannot fall below zero.
I own shares of Sun Life Financial in a dividend reinvestment plan. I would like to know how to calculate the ACB of these shares given how I acquired them: I was originally a policyholder of the Mutual Group and received shares of the company (renamed Clarica) when it demutualized and went public. I then received shares of Sun Life when it subsequently acquired Clarica.
The cost base of shares received through a demutualization is deemed to be zero, said Sun Life spokesman Gannon Loftus. Even though you subsequently received Sun Life shares for your Clarica shares, the cost base of the Sun Life shares remains zero, he said.
However, since your shares are enrolled in a DRIP, you have presumably purchased additional shares since then. To calculate your ACB per share, you would need to add up the dollar value of dividends reinvested and divide by the total number of Sun Life shares you own (your original shares plus those acquired in the DRIP).
I have U.S. equities enrolled in a DRIP. How does the Canada-U.S. exchange rate affect my ACB?
For Canadian tax purposes, you need to calculate your ACB in Canadian dollars. This requires converting the dollar amount of each dividend reinvestment into Canadian currency, based on the exchange rate on the settlement date for each purchase, Mr. Bender said. You can find historical exchange rates on the Bank of Canada website at goo.gl/0BT6y.
Calculating the ACB for some ETFs is complex. Any tips?
Mr. Bender's firm has a helpful guide for ETF investors.
There's also a service, ACBTracking.ca, that handles complex ACB calculations for ETFs, income trusts, real estate investment trusts, closed-end funds and split shares.
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