Calculating Adjusted Cost Base with Reinvested Distributions / Dividend Reinvestment Plans (DRIPs)

In a non-registered account, the income from a dividend or distribution can be in the form of interest income, dividend income, foreign income, capital gains, or return of capital.  With the exception of return of capital, this income is usually immediately taxable in the year of the distribution.  Often mutual fund investors elect to have distributions automatically reinvested back into the fund.  Similarly, stock owners can enroll in a Dividend ReInvestment Plan (DRIP).

When a distribution is reinvested in additional shares/units, it’s still immediately taxable in the exact same way as it would be if you had received cash.  But additional care must be taken to ensure that the Adjusted Cost Base (ACB) is calculated correctly.  If you neglect to factor the reinvestment into your ACB calculations, you’ll end up paying more than you need to in capital gains taxes when the shares are eventually sold.

When a reinvested distribution occurs, it’s best to think of it as 2 separate transactions:

  1. You receive a cash distribution
  2. You purchase additional shares/units using the cash

Although the cash may never physically pass through your hands or even get deposited into your account, a reinvested distribution is seen as two distinct transactions from a tax standpoint.

For calculating ACB, the reinvestment of the distribution is equivalent to a buy transaction.  The total ACB increases by the amount reinvested as follows:

New ACB = (Previous ACB) + (Total Reinvestment)
        = (Previous ACB) + ((Additional Shares Received) x (Cost Per Share of Additional Shares Received))

A reinvested distribution typically doesn’t involve any brokerage commission or any other transactions costs.  But if you do incur these costs they should be added into the ACB.

Example 1: Let’s assume that you own 1,060 units of XYZ Canadian Equity Fund with a total ACB of $22,684.00 and receive a distribution of $321.16, which is entirely reinvested in 12.95 additional units of the fund.  The ACB would become:

New ACB = $22,684.00 + $321.16
        = $23,005.16

Now, a total of (1,060.00 + 12.95 = 1072.95)  units are owned.

It’s important to recognize that in addition to the ACB adjustment, the distribution is taxable in the year of the distribution.  The taxation of the distribution will depend on whether it’s in the form of interest income, eligible dividend income, non-eligible dividend income, foreign income, capital gains, etc.  The tax breakdown should be included on the annual T3 and T5 slips sent by your financial institution, or you can look up this information yourself.  The ACB adjustment, however, will likely not be provided for you.

If all or a portion of the distribution is in the form of return of capital, an additional adjustment to ACB must be made.  Suppose that 25% of the $321.16 distribution is return of capital.  In this case, the ACB must be adjusted (decreased) based on this amount:

New ACB = $23,005.16  ($321.16 x 25%)
        = $22,924.87

Note that if you’re using a value for return of capital per share, this amount should be multiplied by the number of shares owned before the reinvested distribution (1,060 shares).

Sometimes when you elect to have distributions reinvested, you only receive whole shares, and the remainder is distributed in cash.  This is often the case with a synthetic DRIP at a brokerage.  In this case, only the reinvested portion is added to find the new ACB.

Example 2: Let’s alter the above example such that the $321.16 distribution is reinvested in 12 additional units and you receive $23.56 in cash.  The price per unit would therefore be (($321.16 — $23.56) / 12 = $24.80) and the reinvested amount would be ($321.16 — $23.56 = $297.60).  In this case the ACB becomes:

New ACB = $22,684.00 + ($321.16 $23.56)
        = $22,981.60

Let’s assume again that 25% of the $321.16 distribution is return of capital.  In this case, the ACB must still be adjusted (decreased) based on the amount:

New ACB = $22,981.60  ($321.16 x 25%)
        = $22,901.31

Note that the effect of the return of capital is the same regardless of whether the distribution is received as cash, fully reinvested, or partially reinvested.

When you’re enrolled in a dividend reinvestment plan, extra work is required to accurately track ACB.  This can become a tedious chore, especially when distributions occur monthly.  Many investors choose not to participate in DRIPs simply because of the headaches involved with the ACB calculations.

Using AdjustedCostBase.ca can alleviate the pain in tracking ACB caused by frequent and persistent reinvested distributions.  AdjustedCostBase.ca is a free web application that allows you to enter transactions, and the ACB and capital gains are calculated for you.  This saves a lot of time, and allows you to base your decision to enroll in a DRIP on your investing needs rather than your desire to avoid the extra work.

For Example 1 from above, you would add a new “Reinvested Dividend” transaction, setting the appropriate amounts for the reinvested amount and additional shares received:

Reinvested Dividend for Example 1

You could also use a “Buy Transaction” type with a total amount of $321.16 for 12.95 shares and the effect will be exactly the same.  Using a “Reinvested Dividend” transaction, however, makes it easy to see which transactions are related the DRIPs and which are normal purchases.

Next, you would need to create another transaction for the return of capital:

Return of Capital for Example 1

The transactions and resulting ACB after entering these transactions are shown below:

Transactions for Example 1

For Example 2 the transactions would be entered in much the same way, except the “Reinvested Dividend” transaction would be for only 12 shares with a total amount of $297.60.

You may notice the subtle detail that the transaction date for the “Return of Capital” transaction is set the 2014-Sep-02 while the date of the “Reinvsted Dividend” transaction is set to 2014-Sep-03.  This is done to ensure that the return of capital is applied first.  This will not be an issue if the return of capital amount is inputted as a “Total” amount, as opposed to a “Per Share” amount.  But if a “Per Share” amount is used, the number of shares associated with the calculation of total return of capital is 1,060 (not 1,072.95).  Moving the “Reinvested Dividend” transaction a day after the “Return of Capital” transactions ensures that the correct total return of capital will be calculated if you enter if as a “Per Share” amount.  The total return of capital is equal to the return of capital per share multiplied by 1,060 shares.  This also reflects the correct transaction order: first, a distribution occurs, and second, the distribution is reinvested.

 

14 thoughts on “Calculating Adjusted Cost Base with Reinvested Distributions / Dividend Reinvestment Plans (DRIPs)

  1. neilsherri

    Reviewing an old tax year in which I purchased $30,000 mutual fund, 980.2030 units at $30.61 and at year end I received a note from the broker saying there was a Reinvested Dividend of $3.692 units for an amount of $0.00.

    CRA is assessing a capital gain of $142.16 which I will have to pay tax on.

    However I notice when I make the Reinvested Dividend entry of $0.00 with 3.692 units, my ACB drops from $30.61 to $30.49. Shouldn’t a reinvested dividend on which I have to pay capital gains tax increase my ACB, not lower it, since I will pay paying the capital gain tax as assessed?

    Or should I alter the Reinvested Dividend entry to include the amount $142.16 based on the historical unit value of $38.50?

  2. AdjustedCostBase.ca Post author

    The $0.00 amount likely means that you didn’t invest additional cash into the fund, not that the amount of the reinvested dividend is zero. Your brokerage should be able to tell you the amount reinvested, but most likely it’s equal to the fund’s NAV at the time of the reinvestment multiplied by the number of additional units received.

    When a reinvested dividend occurs your total ACB should always increase, however, the ACB per share could either increase or decrease.

  3. jamie

    I am going to calculate the ACB for my parents’ BCE account. Their investing was limited to BCE’s DRP program.

    However, i do not know how they originally entered the program i.e. I don’t have a record of when they purchased the “first” share in order to get started with the DRP, the year it occurred or the value of the initial purchase. Can i still work out the ACB without that information provided i get their first account statement?

  4. AdjustedCostBase.ca Post author

    Your options would include the following:

    1. Use an ACB of zero. This will result in a potentially much higher capital gain than the true value.

    2. Donate the shares. You won’t need to report any capital gains and you’ll be able to report a charitable tax credit equal to the full value of the shares.

    3. Look up the dividend history and use the data in a spreadsheet to backwards calculate the number of shares owned on each distribution date (being careful to account for stock splits). However, if you have no information at all (not even the date of the original purchase or the number of shares originally purchased) it will probably not be possible to reconstruct the necessary information.

    Also, in your case you may want to look at BCE’s online ACB calculator:

    http://www.bce.ca/investors/shareholder-info/transactions-and-cost-base

  5. Rick Friesen

    Hi . I recently sold shares which I had had in a drip program for many years( maybe 20). There was at least one -1 for 3 stock split, name changes over time, etc. I have record of what I paid initially and most statements of new shares added due to the drip monthly or later quarterly. To get my ACB, would I just add up all the money that went into buying the new shares in the drip over the years(from these statements), plus the original cost, and divide that by the total number of shares I have at the end, regardless of splits ? thanks, Rick

  6. AdjustedCostBase.ca Post author

    Rick,

    Yes, you should be able to do that, as long as:

    – There were no sales up until this point
    and
    – The distributions did not include any return of capital and there were no non-cash distributions

  7. Willi Koenen

    Under Dec. 2015 distribution information for the BOM ZWB ETF there was a (presumably re-investment) of 0.130 per unit in addition to the 0.073 paid in cash). The respective amount shows up as a higher than actual received payment on the monthly Tax information I received with the T3 for the Jan 7/16 distribution but is not segregated between the actual cash payment of 0.073 for Dec/15 and this “phantom” amount. Reading the DRIP info above, where there are additional shares issued without an actual payment as proof of distributed value, here there is however no correspondent increase to the amount of UNITS held. So do I just increase the ACB by the respective amount for which my only documentation is the T3 slip which doesn’t provide any information to support that amount of revenue I did not receive, yet have to pay taxes on it. So how can I prove to the Tax people my action of increasing the ACB to reduce my Capital Gains/increase Capitital Loss when selling the units, which did not change in amounts? In other words how can I prove that I only received 0.073 per unit and that the rest was re-invested without increase in Units.
    Looking at it from the customers side, there also is no specific sudden change in the unit price to support such a re-investment by the fund to prove there was an actual re-investment made (without issuing corresponding units!!!!!

    On very important point to consider: Were is the proof that unit owners actually did received value????

  8. AdjustedCostBase.ca Post author

    Willi,

    ACB in general cannot be calculated from your T-slips. It needs to be backed up by your transaction records. The same goes here, and the non-cash distribution should be equal to the difference between all the taxable income and return of capital reported on your T-slip, and the amount of cash distributions received. I would think this alone would be sufficient proof, but also, the CRA can refer to the distribution tax breakdown that each ETF must report.

    Further information about phantom distributions can be found here:

    http://www.adjustedcostbase.ca/blog/phantom-distributions-and-their-effect-on-adjusted-cost-base/

    http://www.adjustedcostbase.ca/blog/streamlined-import-of-return-of-capital-and-phantom-distributions-and-for-exchange-traded-funds-etfs-publicly-traded-mutual-funds-and-trusts/

  9. Rob

    The examples you gave were for Canadian stocks and mutual funds.

    What about $US stocks, mutual funds and $US Investment Savings Accounts (ISA’s) held in a $US margin account?

    Do you do you enter the DRIP distribution as “Reinvestment Income” (and/or “Return as Capital” if applicable) into adjustedcostbase.ca?

    Or do you have to do something different to take into account the $US/$Cdn exchange rate applicable at the time the DRIP distribution was made?

    I have a $US ISA held in a $US Margin Account. Trying to figure out how to calculate its ACB.

    Any insight would be most welcome/

  10. AdjustedCostBase.ca Post author

    Rob,

    AdjustedCostBase.ca has been updated to allow you to enter reinvested dividend transactions in a foreign currency. Thank you for your suggestion.

    You can enter the reinvested dividend in the same way as described here (a reinvested dividend is equivalent to a purchase for the purpose of calculating ACB):

    http://www.adjustedcostbase.ca/blog/calculating-adjusted-cost-base-with-foreign-currency-transactions/

    Note that a distribution considered to be return of capital in a foreign country is generally considered to be fully taxable in Canada.

  11. Rob

    Many thanks for the update. That was fast1

    I have already used it to calculate my ACB for my $US ISA held in a $US Margin Account. It appears to work great.

    P.S. You may want to write a post explaining how to use it for others. (Or add to your original post above).

  12. velle

    Hi,
    I’ve had BMO full drip shares for quite some time now and have never tracked ACB. I’d like to get back and start investing again. To track ACB, I’ve been going through computershare to look at past divident and payment transactions. When I first owned the share, I didn’t select to reinvest the divident and so I used to get cheques in the mail. Do I account for these cheques (paymnet) in ACB? Pardon if I sound confused…I am!

    Thanks

  13. AdjustedCostBase.ca Post author

    Velle,

    Dividends paid in cash should not affect ACB, unless a portion is in the form of return of capital. Assuming all the BMO distributions are in the form of eligible dividends, only any reinvested portion will factor into determining ACB.

  14. Bob Abrams

    Thanks much for your article AdjustedCostBase.ca

    Here are my questions.
    Back in 1996 I invested 3K in a drip which had continued to this year. The company has been bought out this year and my only option is to receive a disbursement check which will amount to approximately 36K.
    I’ve declared and re-invested the dividend income yearly and I don’t think I bought any additional shares on my own (although possible).
    The other issue is the management company changed 5 years ago so they don’t have anything prior. I know I have many of the 1099’s but doubtful that I’d have them all the way back to 1996.
    The new management firm said I could pay them for a “Prior agent statement”.
    So here are my questions.
    1. If I have the same taxman is it likely he’d have that info? I’d buy the statement if needed.
    2. How can I figure out the cost basis and what type of tax hit should I be prepared for.

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