Although rare, the situation can occur where you receive a ROC (return of capital) distribution that exceeds your adjusted cost base. Since ROC normally has the affect of reducing ACB, the question arises: should your ACB be reduced to a negative value in such a case?

The short answer is no, your ACB cannot go below zero, according to Canada Revenue Agency rules.

In such a case where ROC exceeds adjusted cost base, the ACB is reduced to $0. Furthermore, the amount by which the ROC exceeds the ACB is immediately taxable as a capital gain in the year of the distribution. Once the ACB has been reduced to $0, any further ROC distributions are entirely taxable as capital gains immediately.

The AdjustedCostBase.ca calculator takes this rule into consideration. The following example demonstrates this:

The transactions are as follows:

- The first transaction in April is a purchase of $1,000 of the security with a $10 commission, resulting in an initial ACB of $1,010.
- Next, in May, a $500 ROC distribution occurs, reducing the ACB to $510.
- Then in June, a $600 ROC distribution occurs. In this case, the ACB is reduced to $0 since $600 exceeds the ACB of $510. Furthermore, a capital gain of $90 ($600 less $510) is immediately applicable and must be reported for the 2014 tax year.
- Finally in July, a further ROC distribution occurs. Since the ACB has already been reduced to zero, the entire distribution of $100 is taxable as a capital gain in 2014.

Bonnie DenisHello, I am confused on how to deal with monthly distributions on a REIT that are reinvested. Using your spreadsheet I entered the additional monthly shares as dividends reinvested and the ACB did not change. If I enter the dollar amount of the distribution as a return of capital, there is no place for me to enter the additional shares.

Can you please advise. This spreadsheet is good but difficult to understand. It would be better if you added some explanations.

Thanks

Bonnie Denis

AdjustedCostBase.caHi Bonnie,

To read about more information on reinvested distributions, please see the following page:

http://www.adjustedcostbase.ca/blog/calculating-adjusted-cost-base-with-reinvested-distributions-dividend-reinvestment-plans-drips/

Note that in the case where a distribution has a return of capital component and is reinvested, you must enter two transactions on AdjustedCostBase.ca: one for the return of capital and another for the purchase of the new shares.

EluiMy limited partnership end this year and the adjusted cost base as at December 31, 2014 is a negative value. May I know whether I need to pay more tax or less tax with this entry?

Thanks

JimmyDo you have a CRA document showing that rule (ACB cannot be negative)?

AdjustedCostBase.caJimmy,

I believe this is discussed in section 40(3) of the Income Tax Act:

http://laws-lois.justice.gc.ca/eng/acts/I-3.3/page-47.html

Sharon1If you have after many years 280 shares of a company with now a ACB of zero because of many ROC. If you now purchase 90 more shares at $55.61 per share and a $43.00 commission how do you get the right new ACB.

AdjustedCostBase.caSharon1,

The same rules for calculating ACB would apply once it’s been reduced to zero due to ROC. In this case the new ACB would be:

$0.00 + (90 shares x $55.61/share) + $43.00 = $5,047.90

Sharon1Thank you so much. Just checking that my price ACB per share would now be $5047.90/ 370 shares (280 +90) giving me $13.64.

AdjustedCostBase.caSharon1,

Yes, you got it.

AnthonyI had purchased Royal Mutual Funds Inc RBC US Mid Cap Value Equity.

I have now transferred into my RBC direct investment account.

I have transferred out the units. I bought the same Mutual Fund version a class D with lower managerment fee I was told it will not trigger a Capital Gains. How do I enter the transfer transcation with this Software? Return of Capital or Sale?

AdjustedCostBase.caPost authorAnthony,

An exchange of shares or units that does not trigger a capital gain and the ACB is carried over can be inputted into AdjustedCostBase.ca as follows:

1. A sell transaction for all the units of the previous fund for an amount equal to the total ACB just before the exchange occurs (this should result in a capital gain of $0).

2. A buy transactions for the new fund for the same amount as above.

AnthonyThe Net Asset Value is not same price.

Thank you for your comments

AdjustedCostBase.caPost authorAnthony,

I’m not sure I understand your follow-up, but please note that net asset value is not used to determine ACB.