Calculating adjusted cost base and capital gains can be a very onerous task. Canadian investor may question the need to do this themselves when they feel it should be their brokerage’s responsibility. Unfortunately, brokerages are not required to provide their customers with information on adjusted cost base and capital gains. In fact, in the general case, it’s impossible for a brokerage to provide an accurate report of adjusted cost base because they don’t always have access to all the required information. As a result, the onus is on the investor to calculate adjusted cost base for themselves.
Many Canadian brokerages do in fact provide figures on adjusted cost base. They may refer to these values as “average cost” or “book value.” However, these numbers are notoriously unreliable. They are very often inaccurate, and sometimes by a wide margin. Brokerages do not intend for this information to be used for tax purposes — it’s meant to provide customers with a picture of their gains/losses and returns. In fact, these values are typically coupled with disclaimers indicating that the information must not be used for tax purposes. For example, the following disclaimer is displayed below Scotia iTRADE’s “Realized Gain/Loss” report:
“Scotia iTRADE® provides cost basis and associated realized gain and loss information to you as a courtesy service and for informational purposes only and is not for official tax purposes.”
Relying on your brokerage’s potentially erroneous ACB figures can be problematic, no matter which direction the error occurs. If the reported ACB value is too low (resulting in a higher capital gain) you’ll end up paying more tax than necessary. If the ACB is too high (resulting in a lower capital gain) you’ll risk getting chased by the CRA. It’s therefore strongly advisable to calculate these values on your own to ensure correctness.
There are a wide variety of reasons why your brokerage’s ACB values can be inaccurate. Some of these reasons relate to the fact that your brokerage has an incomplete picture of the required information, while others relate to erroneous calculations and neglected information.
Your brokerage’s ACB and capital gains values may be incorrect for the following reasons:
- Brokerages may fail to account for return of capital (which reduces ACB) or phantom distributions (which increase ACB).
- Brokerages may fail to account for reinvested distributions when calculating ACB.
- Brokerages do not have access to all the required information to determine whether a capital loss qualifies as a superficial loss. For example, a transaction in your spouse’s account can potentially cause a capital loss to qualify as a superficial loss, and your brokerage has no way of knowing about this.
- Adjusted cost base must be calculated by factoring in all identical securities owned. In other words, ACB should not be calculated on a per-account basis. If you own the same security through two brokerages, neither one will be able to correctly calculate ACB because neither has a complete picture of all your transactions.
- Your brokerage may not properly consolidate your ACB when you own the same security in multiple accounts, even when the accounts are all at the same brokerages.
- When assets are transferred from one brokerage to another, the adjusted cost base information is often not communicated between the two brokerages. In the case, the receiving brokerage may incorrectly set the adjusted cost base to the current market value.
- On the other hand, when securities are transferred from another individual’s account into your account (for an inheritance, for example), your brokerage may incorrectly copy over the ACB information instead of using the market value, even though a deemed disposition has occurred.
- Some brokerages may allow customers to edit the adjusted cost base/average cost/book value. This may then become a case of too many cooks in the kitchen with multiple sides meddling with the numbers.
- If your brokerage does somehow manage to accurately report ACB, it may be difficult to tell when the number was last updated and whether recent transactions have been taken into account.
- Brokerages may fail to properly account for special events such as mergers and acquisitions.
For the reasons mentioned above, individual investors need to be responsible for calculating their adjusted cost base. AdjustedCostBase.ca is a free tool that can make this process much less painful.
South of the border, the IRS now requires cost basis information to be calculated by brokerages. The Emergency Economic Stabilization Act of 2008 dictated that brokerages begin providing this information starting in 2011. While this has made things easier for investors in the United States, no such requirement exists in Canada. Such a requirement would be much more difficult to implement in Canada due to the differences in calculating adjusted cost base/cost basis between Canada and the U.S. In the U.S., cost basis can be tracked using several methods including specific share identification and first-in, first-out (FIFO). These methods alleviate many of the issues listed above.