In order to accurately calculate adjusted cost base and capital gains a complete history of all transactions is required, including not only purchases and sales, but also reinvested distributions, return of capital, phantom distributions, and splits. A common and unfortunately occurrence is when a Canadian investor has owned a security for a long time, has failed to maintain a record of adjusted cost base, and has not kept a record of all transactions.
A common example of this dilemma is when an investor has bought shares decades ago, enrolled in the company’s dividend reinvestment plan (DRIP), neglected to track ACB (perhaps not realizing that this is necessary), and failed to keep copies of all the transaction records. The consequences of this problem will only surface once the shares are eventually sold and capital gains taxes are due.
In such a case, you might be tempted to fudge the numbers and try to come up with a reasonable estimate for ACB. However, this will become problematic if the Canada Revenue Agency initiates an information request or audit. If you’re unable to provide the required information, the CRA may reassess your claim, resulting in an adjustment to your taxes owed and possibly interest and penalties.
In cases like this you have the following options:
- Use an ACB of zero. Since ACB cannot be negative, such a claim will not likely be challenged. However, you’ll end up paying more tax than necessary since your reported capital gains will be higher than their true value.
- Donate the shares. When you donate qualifying securities in-kind to a recognized charitable organization, not only will you be able to claim a tax credit on the full market value of the shares, but you’ll avoid paying taxes on any capital gains. Indeed this can be a very efficient way to make a charitable donation. The benefits of this are two-fold: the tax reduction is higher compared to making an equivalent cash donation and you avoid the hassle of calculating ACB.
- Establish a guaranteed minimum for ACB. In some cases if you have some partial information, you can use it to prove a minimum adjusted cost base amount. For example, let’s say that you have a record of the original stock purchase but no records for any reinvested distributions. In such a case you could set the ACB equal to the value of the original purchase. As long as there were no return of capital distributions, the ACB is guaranteed to be no less than this amount. This will still result in claiming a higher capital gain (or lower capital loss) than the true amount but it’s still better than using an ACB of zero (option 1).
- Reconstruct the necessary information using online data sources and a spreadsheet. Yahoo! Finance provides historical information on prices, dividends and splits. The investor relations part of a company’s web site may also provide such information. For example, if you only know the the original purchase date and were enrolled in a company’s dividend reinvestment plan, you might be able to calculate the ACB using a spreadsheet in conjunction with the historical price, dividend and split data.
- Use the specific company’s online tool. A limited number companies provide online tools for calculating ACB specifically for investors in their own shares. However, a minimum amount of information (usually at least the initial purchase information) is required. It may be worth searching online to see if such a tool exists for your investment. Here are some examples:
AdjustedCostBase.ca is a web-based ACB calculator that’s freely available to use. You’re invited to try it out as AdjustedCostBase.ca can be useful even for the above-mentioned scenarios where complete transaction details are not available.
Is it possible to use the capital gain reported on year end mutual fund statements and go backwards six months to determine the capital gain at the deemed disposition that occurred at death? Transactions for the year in question are known, and for several years past, but unfortunately not for early years.
That’s probably a reasonable thing to do. Mutual fund companies are usually more reliable in reporting adjusted cost base and capital gains compared to brokerages (see http://www.adjustedcostbase.ca/blog/can-you-rely-on-your-brokerage-for-calculating-adjusted-cost-base-and-capital-gains/), since they often have access to all the necessary information and are only dealing with their own funds which they know well.
I work in an organisation where it is not always possible to retrieve or calculate the ACBs of investments and properties. In such cases, should the ACB be reported as zero? Can we use the earliest known market value as the ACB? Thanks and regards,
I have some very complex capital gains to calculate across foreign shares and multiple foreign bank accounts going back over 10 years. I have all the details and I think the numbers are accurate but my question is this: just how detailed are CRA going to be if they ask for follow-up? As it stands, I’d have to send them hundreds of pages of statements, around 100 confirms (mostly for dividend re-investments) and pages and pages of ACB calculations if they asked. I can’t believe that they would want to go through that lot for what amounts to a fairly small amount of tax (< 10K CAD). What's their approach in situations like this?