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.

 

34 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

    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

    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

    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

    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

    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

    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.

  15. Richard

    Hi, guys, i hope some of you can help me out with my REITs ACB calculation. Much appreciated!

    My REITs situation is a bit different, because not all the dividend goes to buy the share and i have some leftover cash, and I don’t know how to calculate the cash part.

    Fort instance,
    I had 100 units of one REIT, i bought it 100 X 8(per share), plus commission of 10 dollars, my ACB is 100 X 8+10 = 810
    then came the dividend, 0.1 dollars per share, so the dividend is 10 dollars, with this 10 dollars, 9 was used to buy 1 share and 1 dollars left in the balance. How do i calculate the ACB now? it would be easy if all of the dividend goes to buy share.

    Also in my T3, for that dividend of 10 dollars, they broke it down to 3 (21), 5(26) and 2 (42 also meant ROC). I just got so confused with all these number. If any of you can tell me how the cash goes, and how to use ROC in T3, I would be much appreciated.

  16. Richard

    Sorry, i didn’t read this article carefully enough. thanks for this awesome article.

    now i know how to calculate my ACB, so my scenario above is:

    New ACB is: 100 X 8 + commission + 9 – 2
    If the commission is 10 dollars, the total is: 810+9-2= 817. And my ACB per share is 817/11= 74.27

    Correct me if i am wrong. Thanks again everyone!

  17. AdjustedCostBase.ca

    Richard,

    Please refer to Example #2 above, which shows a case where only some of the cash from a distribution is reinvested. In cases like this only the reinvested portion increases ACB and only that amount should be inputted for a Reinvested Dividend transaction on AdjustedCostBase.ca. In your example your total ACB would increase by $9 as a result in the reinvestment.

    If a portion of the distribution is ROC then that amount would decrease ACB. When a distribution is fully ROC and fully reinvested then the effect on ACB cancels out, however, in your example only part reinvested and only part is ROC. In addition to the $9 increase in ACB as a result of the reinvestment, there would be a decrease in ACB of $2, for a net increase of $7.

    This example can be inputted into AdjustedCostBase.ca as follows:

    1. Return of Capital: $2 total
    2. Capital Gains Dividend: $3 total
    3. Reinvested Dividend: $9 total for 1 share

    If inputting the return of capital amount as a per share value, you’ll need to ensure that this transaction is ordered before the reinvested dividend transaction.

  18. AdjustedCostBase.ca

    Richard,

    That’s correct, the ACB following the distribution and reinvestment would be $817 in total or $74.27 per share.

  19. Pingback: Ask the Spud: Can I Make Taxable Investing Easier? | Canadian Couch Potato

  20. Sam

    Sorry to ask a dumb question, but what date would you pick for the “buy” date of a dividend which is reinvested in a mutual fund (when does the “transaction” happen)? I am new to investing and new to mutual funds and never new that just selling some losing mutual funds would involve me in all this. FYI my T5 is describing Capital Gains Dividends.

  21. AdjustedCostBase.ca

    Sam,

    I would use the distribution payment date for a reinvested distribution. Note that the exact date probably won’t make any difference in your calculations as long as there are no sales around that time.

  22. Sam

    Thanks very much for your reply. Would you add up all the reinvested dividends from the time you owned the funds till you sold them? I’m surprised that the mutual fund co. doesn’t keep track of the ACB of such funds for us. My mom’s accountant seems to be using the book cost as the ACB for her mutual funds but I thought this was a different thing.

  23. AdjustedCostBase.ca

    Sam,

    Adding up all reinvested dividends to calculate ACB may work in some cases, such as when there are no sales over that period of time, but in general, ACB needs to be calculated incrementally.

  24. Rob

    Sam,

    In my experience, most mutual find companies do keep track of the ACB taking into account reinvested dividends for its customers. Considering the cost of most mutual funds that is the least they can do. Just phone them.

    If you bought your mutual find through a broker etc, you broker can also provide you with the most up to date ACB.

    Or you can calculate the ACB yourself using this website.

  25. Willi Koenen

    From my experience as of late that is correct (relating to relatively recent new investments). Unfortunately not every party has done so many years ago. Trouble is when you move your account from one party to another, for example even from one subsidiary of, say, a Bank to another as I have done twice. All the receiving party has on file are the present units and and the current price. So they have no way to provide you with the correct ACB, the reason, at least my Bank states that ACB qouted by them is not guaranteed.
    From my first investment ever and for any security: I created a relatively simply spreadsheet and entered every transaction as it occurred, making appropriate changes when I receive T3 slips as during the year all I received were funds in cash or re-invested including applicable number of shares or units without any breakdown between, say Dividends and Capital Gains, Foreign Revenue, Foreign Tax paid, etc. and particularly Return of Capital, as the latter can for some funds be quite a high percentage, all of which affects the ACB. Another method is investing into some software. i.e. I also use Quicken from Intuit where I also enter the data and make appropriate changes after I receive my T3 (Canada). And comparing Quicken so far it always concurs with my one calculation but for quite a few securities I hold the info I receive from my Bank as to ACB is incorrect – in some cases by quite a lot – new securities purchased via my latest brokerage party I use are dead on. Yes keeping your info up-to-date yourself is work intensive, but a lot easier than trying to determine the correct ACB after holding a security for a long, long time with lots of monthly re-investments including sales &/or purchases during that time.

  26. Roberto

    If this is a reinvested dividend, wouldn’t I also need to have a third line recording Capital Gains Dividends in either example, in order to keep track of Capital gain or loss?

  27. Tom

    Hi,

    I have had shares in a DRIP for many years and have traced the ACB. In Jan 2016, I removed 73 shares from the DRIPand put them in my brokerage account. I then sold these 73 shares in Oct 2016.

    Do I need to make an entry in ACB and if so, what kind of entry?

    Many thanks for this tool, it has been a godsend.

  28. Tom

    I forgot to mention that these 73 shares were my original investment. Not sure if that matters.

    Tom

  29. AdjustedCostBase.ca

    Roberto,

    If a reinvested distribution consists entirely of capital gains, it can be inputted into AdjustedCostBase.ca as a Reinvested Capital Gains Distribution transaction. Or, if only a part of it consists of capital gains, you can use a combination of a Buy transactions along with a Capital Gains Dividend transaction. Also note that a capital gains distribution doesn’t affect ACB, but rather results in an immediate capital gain. As such, you don’t necessarily need to input this into AdjustedCostBase.ca as it will appear on your T-slips, however, you can choose to do so in order to get an accurate picture of your total capital gains for the year.

  30. AdjustedCostBase.ca

    Tom,

    You would need to account for the original purchase, the increases in ACB resulting from each of the dividend reinvestments and the sale when calculating your capital gain. However, the transfer of your shares to another account belonging to you should not result in a deemed disposition and as such no ACB accounting for the transfer should be needed.

  31. Tom

    Thanks. Another question…When I fill out my Schedule 3 and enter the ACB, would that be the ACB immediately prior to the sale or the ACB shown after the sale? This is probably a stupid question but I’m a bit frazzled.

  32. AdjustedCostBase.ca

    Tom,

    On Schedule 3 the ACB should be the ACB for the shares that were sold immediately prior to the sale (number of shares sold x ACB per share).

  33. Ala

    My husband and I own DRIP of BNS together. In addition I own the DRIP of BNS myself. Could you please let me know how to keep track of ACB for my husband and also for myself using adjustedcostbase.ca.

    Thank you
    Ala

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