Order of Transactions for Calculating Adjusted Cost Base

When calculating adjusted cost base, it’s important to use the correct ordering of the transactions.  In some cases it may not matter – for example, in a sequence of multiple buy transactions, the order within that sequence will not affect the final result.  But where buy transactions are interlaced with sell transactions, the order matters.

The correct order to use is the chronological order.  A transactions that occurs first (based on the settlement date if applicable) should be applied towards the ACB first.  When transactions occur on distinct dates, there’s a lower chance of confusion.  But when multiple trades (or types of distributions) occur on the same date, the ACB calculation process becomes more prone to errors.

Let’s look at a simple example.  Assume that the following transactions take place for BCE, all on Monday, November 3rd, 2014 (with a settlement date of Thursday, November 6th, 2014):

  1. At 9:30AM you buy 100 shares at a price of $51.45 per share
  2. At 11:00AM you sell 25 shares at a price of $52.95 per share
  3. At 3:30PM you buy 75 shares at a price of $55.25 per share

In this example we’ll assume that there are no brokerage commissions for simplicity.  The correct, chronological order of the transactions is: 1, 2, 3.  The ACB will be calculated as follows, assuming that your ACB for BCE is initially zero before these trades occur:

Settlement Date Transaction Shares Bought or Sold Price Per Share Share Balance ACB ACB per Share Capital Gain (Loss)
1. 2014-11-06 Buy 100 $51.45 100 $5,145.00 $51.45
2. 2014-11-06 Sell 25 $52.95 75 $3,858.75 $51.45 $37.50
3. 2014-11-06 Buy 75 $55.25 150 $8,002.50 $53.35

With the correct transaction order, a capital gain of $37.50 occurs from the sell transactions.

Now, let’s mix up the transaction order as follows: 1, 3, 2.  Now the two buy transactions will now be factored into the adjusted cost base before the sell transaction.  This results in the following:

Settlement Date Transaction Shares Bought or Sold Price Per Share Share Balance ACB ACB per Share Capital Gain (Loss)
1. 2014-11-06 Buy 100 $51.45 100 $5,145.00 $51.45
3. 2014-11-06 Buy 75 $55.25 175 $9,288.75 $53.08
2. 2014-11-06 Sell 25 $52.95 150 $7,961.79 $53.08 ($3.21)

As you can see, the capital gain of $37.50 from the sell transaction is now transformed into a capital loss of $3.21.  Factoring the incorrect transaction ordering into the ACB calculations results in an incorrect capital gain.  Note that the final ACB and ACB per share are also incorrect.  When the balance of the shares are eventually sold, the total capital gain (or loss) will remain the same in the case, regardless of the transaction order.  However, the allocation of capital gains or losses over time will differ.

Please also note that the above calculations assume the transaction are on capital account, as opposed to income account.  If you consistently have a large number of transactions for a security on a single day, the CRA may deem the transactions to be on income account due to a high transaction frequency, fast turnover rate, and short period of ownership.  In this case, you cannot claim the gains and losses as capital gains and losses, and adjusted cost base does not apply.

In cases where frequent trading occurs and where a capital loss has occurred, the superficial loss rule may apply.  In this case, all or part of the capital loss may be denied.

When using AdjustedCostBase.ca for calculating ACB, it’s also important to pay attention to transaction order.  For transactions with distinct dates, the ordering will be handled automatically – transactions with earlier dates will be factored into the ACB before transactions with later dates.  But users will need to be careful in cases where multiple transactions occur on the same date for a particular security.

By default, transactions for the same security with identical dates will be ordered in the same order the transactions were entered on AdjustedCostBase.ca.  So the easiest thing to do is to enter the transactions in the order they occur.  But users are also able to rearrange the transaction order after the transactions have been inputted.

Let’s look at the example above, inputted into AdjustedCostBase.ca, with the incorrect transaction order (1, 3, 2):

BCE - Incorrect Transaction Order

In this case a capital loss of $3.21 occurs.  AdjustedCostBase.ca provides you with the ability to correct the transaction order.  In the case where multiple transactions occur on the same date for a particular security, an “Order” column will appear in the transaction list, with arrows allowing you to move transactions up or down.

To correct the transaction order, we can click on the down arrow for transaction 3 (or, it could be corrected by clicking on the up arrow for transaction 2).

Arrows to Reorder Transactions

After doing so, the adjusted cost base and capital gain are corrected:

BCE - Correct Transaction Order

When using AdjustedCostBase.ca, the simplest thing to do is to add transactions occurring on the same day in the order they occur (i.e., enter the first transaction first).  This way, the transaction order will be correct from the get go, and you won’t need to rearrange the order afterwards.

You’re only able to change the order among transactions that occur on the same day, for the same security.  The order for transactions occurring on different days is determined based on chronological order.  Also, if an options transaction is opened and closed on the same day, the closing portion must occur after the opening portion (you will not be allowed to move the closing portion such that it’s earlier than the opening portion).

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