The Effect of Stock Splits on Adjusted Cost Base

Occasionally a stock split occurs whereby the number of shares in a corporation is increased.  For example, a 2-for-1 stock split doubles the number of outstanding shares.  Each share is essentially divided into 2, such that each shareholder owns twice as many shares after the split occurs.  All else being equal, the market capitalization will be unaffected, and each share will have a market value equal to half of the pre-split market value.

In terms of adjusted cost base, the total ACB is unaffected.  However, the ACB per share decreases according to the split ratio.  For example, suppose a shareholder owns 100 shares of Royal Bank (RY) with a total ACB of $5,000.  The ACB is ($5,000/100 shares) = $50 per share.  After a 2-for-1 split occurs, the shareholder will receive 2 shares for each share owned, resulting in 200 shares.  The total ACB remains the same at $5,000.  However, the ACB per share is now equal to ($5,000/200 shares) = $25 per share.

Although less common, reverse splits can also occur.  For example a 1-for-2 ratio indicates that the number of shares will be cut in half.  Similarly, the total ACB will remain the same but the ACB per share will increase accordingly.

AdjustedCostBase.ca supports the reporting of splits.  Following the example above, a split transaction can be entered as follows:

Split Transaction Entry

The affect of this transaction on the ACB is shown here:

Split Transactions

The number of shares is increased from 100 to 200, the total ACB remains the same, and the ACB per share changes from $50 to $25.

9 thoughts on “The Effect of Stock Splits on Adjusted Cost Base

  1. Tyler

    Just wondering, if there is a reverse split (say, 2 shares are joined to become 1), and I’m holding 101 shares, I receive cash for the odd share. How does this affect the ACB calculation?

    Thanks.

  2. AdjustedCostBase.ca Post author

    Tyler,

    The single share would be deemed to have been sold, and the proceeds would be equal to the cash received.

    For example, let’s say that you held 101 shares of ZYX with a total ACB of $1,010 (or $10 per share). You receive $15 in cash for the odd share right before a 1-for-2 split. This results in a capital gain of ($15 — $10) = $15. The total ACB then becomes ($1,010 — $10) = $1,000 (still $10 per share). After the split, the total ACB remains $1,000 but the ACB per share is now $20 since there are now 50 shares.

    When entering these transactions on AdjustedCostBase.ca be sure to set the date for the sale of the odd share at least one day before the date of the split transactions. This is because the sale of the odd share occurs pre-split.

  3. Tyler

    Thanks for the quick response, makes sense. Just to make sure, though: do you mean a capital gain of ($20 – $10) = $10?

  4. Jamie

    How do I enter common share consolidation? BCE consolidated shares when they spun off Bell Alliant however I am not sure how to enter this in the calculator.

    jamie

  5. AdjustedCostBase.ca Post author

    Jamie,

    For the Bell Aliant spin-off from BCE in 2006, you’ll find an example calculation in this page:

    http://www.bce.ca/transactions/bell-aliant-regional-communications-income-fund

    “Assume that you own 250 pre-consolidation common shares having an aggregate tax cost of $5,605 and that the value of your unit entitlement and / or the whole and fractional units that were sold on your behalf was $605 (250 x 0.0725 = 18.125 units, with an assumed value of $33.40, for a total of $605). The tax cost of your consolidated common shares would be determined as follows:

    “Calculation of BCE cost – 250 pre-consolidation common shares x 0.915 = 228.75 consolidated common share

    “The tax cost of the pre-consolidation common shares of $5,605 is reduced by $605 as a result of the distribution of the units which distribution is received tax-free. The remaining $5,000 is the tax cost of the 228.75 consolidated common shares and $605 is the tax cost of the units received and / or the whole and/or fractional units that were sold on his or her behalf.”

    For this example, you could enter the following transactions on AdjustedCostBase.ca:

    1. Buy 18.125 units of Bell Aliant for a total cost of $605.38.
    2. Buy 0 units of BCE for -$605.38 (a negative value) (to reduce the ACB to reflect the transfer of capital from BCE to Bell Aliant).
    3. A 228.75-for-250 share split (or 0.915-for-1) for BCE (to adjust the number of shares based on the ratio of consolidation).

    Note that there are further complications for this case, such as fractional units being sold, or cash being received instead of Bell Aliant units for shareholders with less than 150 shares.

  6. RC

    0 share or negative value (sell/buy $) can’t be entered in adjustedcostbase.ca. So spin-off can’t be done by adjustedcostbase.ca.

  7. AdjustedCostBase.ca Post author

    RC,

    Thank you for reporting the issue. You should now be able to input a negative value for buy transactions and record as spin-off as suggested above.

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