{"id":289,"date":"2014-08-30T10:46:04","date_gmt":"2014-08-30T14:46:04","guid":{"rendered":"http:\/\/www.adjustedcostbase.ca\/blog\/?p=289"},"modified":"2017-03-02T12:26:34","modified_gmt":"2017-03-02T17:26:34","slug":"how-to-calculate-adjusted-cost-base-acb-and-capital-gains","status":"publish","type":"post","link":"https:\/\/www.adjustedcostbase.ca\/blog\/how-to-calculate-adjusted-cost-base-acb-and-capital-gains\/","title":{"rendered":"How to Calculate Adjusted Cost Base (ACB) and Capital Gains"},"content":{"rendered":"

The Canada Revenue Agency (CRA) requires, in most cases, that taxes be paid on capital gains for all property including investments such as stocks, bonds, mutual funds, and exchange-traded funds. In the simplest form, a capital gain is equal to the proceeds received when selling a property, minus the original cost of the property.<\/p>\n

As a simple example, let\u2019s assumed that you purchased 100 shares of RY for $50 per share settling on March 3, 2012. Then you sell all 100 shares for $120 per share settling on May 1, 2014. For simplicity, let\u2019s assume that you did not pay any commission on either the purchase or sale transactions. In this case the cost of the shares is equal to<\/p>\n

  100 shares x $50\/share\r\n= $5,000<\/pre>\n
and the total proceeds of the sale is equal to:<\/p>\n
  100 shares x $120\/share\r\n= $12,000<\/pre>\n
This results in a capital gain (applied in the year 2014) equal to:<\/p>\n
Capital Gain = [Sale Proceeds] \u2013 [Original Cost]\r\n             = $12,000 \u2013 $5,000\r\n             = $7,000<\/pre>\n
This particular example is very simple because there are no transaction costs, and there is only a single purchase transaction and only purchase and one sale where all shares are sold. When transaction costs are incurred, they must be added to the cost of the shares when buying and subtracted from the sale proceeds when selling. The most common transaction costs for stocks are brokerage commissions, but in general transaction costs can include a number of other such as legal fees.<\/p>\n
Things become more complex when there\u2019s a series of multiple buy and sell transactions at various price levels. In this case you might ask yourself, when a sale transaction occurs where only a portion of shares are sold, what should I use as the cost when calculating the capital gain? Should I use the cost of the first shares purchased? The most recent shares purchased? The answer is that the CRA requires you to keep a running total of the Adjusted Cost Base (ACB) for tax purposes.<\/p>\n
When you buy shares, the total ACB is recalculated to be the previous total ACB, plus the total cost of the new shares, plus any transaction costs:<\/p>\n
New Total ACB After a Buy Transaction = [Previous Total ACB] + [Cost of New Shares] + [Transaction Costs]<\/pre>\n
Or, it can be expressed using the price per share and number of shares purchased:<\/p>\n
New Total ACB After a Buy Transaction = [Previous Total ACB] + ([Share Price] x [Number of Shares Purchased]) + [Transaction Costs]<\/pre>\n
When a sale transaction occurs, the new total ACB must be reduced from the previous based on the proportion of shares that are sold:<\/p>\n
New Total ACB After a Sell Transaction = [Previous Total ACB] x (([Previous Number of Shares] \u2013 [Number of Shares Sold]) \/ [Previous Number of Shares])<\/pre>\n
Or,<\/p>\n
New Total ACB After a Sell Transaction = [Previous Total ACB] \u2013 ([ACB per Share] x [Number of Shares Sold])<\/pre>\n
The capital gain (or loss) from a sale is calculated by taking the proceeds of the sale (less transaction costs) and subtracting the ACB per share multiplied by the number of shares sold:<\/p>\n
Capital Gain (or Loss) = ([Share Price] x [Number of Shares Sold]) \u2013 [Transaction Costs] \u2013 ([ACB per Share] x [Number of Shares Sold])\r\n                       = ([Share Price] x [Number of Shares Sold]) \u2013 [Transaction Costs] \u2013 (([Total ACB] \/ [Previous Number of Shares]) x [Number of Shares Sold])<\/pre>\n
Note that ACB can be expressed either as the total ACB or ACB per share. It is important not to confuse the two forms.<\/p>\n
As a more complex example, let\u2019s assume the following transactions occur:<\/p>\n
\n\r\n\r\n
<\/th>\nSettlement Date<\/th>\n Transaction<\/th>\n Shares Bought or Sold<\/th>\nPrice Per Share<\/th>\nCommission<\/th>\n Share Balance<\/th>\n<\/tr>\n<\/thead>\n
1.<\/td>\nMar 3<\/td>\nBuy<\/td>\n100<\/td>\n$50<\/td>\n$10<\/td>\n100<\/td>\n<\/tr>\n\r\n
2.<\/td>\nMay 1<\/td>\nSell<\/td>\n50<\/td>\n$120<\/td>\n$10<\/td>\n50<\/td>\n<\/tr>\n\r\n
3.<\/td>\nJul 18<\/td>\nBuy<\/td>\n50<\/td>\n$130<\/td>\n$10<\/td>\n100<\/td>\n<\/tr>\n\r\n
4.<\/td>\nSep 25<\/td>\nSell<\/td>\n40<\/td>\n$90<\/td>\n$10<\/td>\n60<\/td>\n<\/tr>\n<\/tbody><\/table><\/div>\n
Transaction 1 is identical to the first transaction in the previous example<\/p>\n
New Total ACB = [Previous Total ACB] + ([Share Price] x [Number of Shares Purchased]) + [Transaction Costs]\r\n              = $0 + ($50\/share x 100 shares) + $10\r\n              = $5,000 + $10\r\n              = $5,010<\/pre>\n
Note that a capital gain does not occur for a buy transactions; it only needs to be calculated for a sell transaction.<\/p>\n
For Transaction 2, the new ACB becomes:<\/p>\n
New Total ACB = [Previous Total ACB] x (([Previous Number of Shares] \u2013 [Number of Shares Sold]) \/ [Previous Number of Shares])\r\n              = $5,010 x ((100 shares \u2013 50 shares) \/ 100 shares)\r\n              = $2,505<\/pre>\n
The capital gain for Transaction 2 is calculated as follows:<\/p>\n
Capital Gain (or Loss) = ([Share Price] x [Number of Shares Sold]) \u2013 [Transaction Costs] \u2013 (([Total ACB] \/ [Previous Number of Shares]) x [Number of Shares Sold])\r\n                       = (($120\/share x 50 shares) \u2013 $10) \u2013 (($5,010 \/ 100 shares) x 50 shares)\r\n                       = $3,485<\/pre>\n
Next, Transaction 3 (a purchase transaction) results in the following ACB:<\/p>\n
New Total ACB = [Previous Total ACB] + ([Share Price] x [Number of Shares Purchased]) + [Transaction Costs]\r\n              = $2,505 + ($130\/share x 50 shares) + $10\r\n              = $9,015<\/pre>\n
Finally, Transaction 4 (a sell transactions) results in the following ACB:<\/p>\n
New Total ACB = [Previous Total ACB] x (([Previous Number of Shares] \u2013 [Number of Shares Sold]) \/ [Previous Number of Shares])\r\n              = $9,015 x ((100 shares \u2013 40 shares) \/ 100 shares)\r\n              = $5,409<\/pre>\n
And a capital loss of $16 occurs:<\/p>\n
Capital Gain (or Loss) = ([Share Price] x [Number of Shares Sold]) \u2013 [Transaction Costs] \u2013 (([Total ACB] \/ [Previous Number of Shares]) x [Number of Shares Sold])\r\n                       = (($90\/share x 40 shares) \u2013 $10) \u2013 (($9,015 \/ 100 shares) x 40 shares)\r\n                       = \u2013$16<\/pre>\n
As you can see, calculating ACB can become very tedious and complex.\u00a0 The onus is on the taxpayer to track ACB and calculate capital gains. Your brokerage will not, in most cases, perform the calculations for you. And even if they do, the information can often be wrong.<\/p>\n
The calculations are summarized in the following table:<\/p>\n
\n\r\n\r\n
<\/th>\nSettlement Date<\/th>\n Transaction<\/th>\n Shares Bought or Sold<\/th>\nPrice Per Share<\/th>\nCommission<\/th>\n Share Balance<\/th>\nACB<\/th>\nACB per Share<\/th>\nCapital Gain (Loss)<\/th>\n<\/tr>\n<\/thead>\n
1.<\/td>\nMar 3<\/td>\nBuy<\/td>\n100<\/td>\n$50<\/td>\n$10<\/td>\n100<\/td>\n$5,010<\/td>\n$50.10<\/td>\n\u2013<\/td>\n<\/tr>\n\r\n
2.<\/td>\nMay 1<\/td>\nSell<\/td>\n50<\/td>\n$120<\/td>\n$10<\/td>\n50<\/td>\n$2,505<\/td>\n$50.10<\/td>\n$3,485<\/td>\n<\/tr>\n\r\n
3.<\/td>\nJul 18<\/td>\nBuy<\/td>\n50<\/td>\n$130<\/td>\n$10<\/td>\n100<\/td>\n$9,015<\/td>\n$90.15<\/td>\n\u2013<\/td>\n<\/tr>\n\r\n
4.<\/td>\nSep 25<\/td>\nSell<\/td>\n40<\/td>\n$90<\/td>\n$10<\/td>\n60<\/td>\n$5,409<\/td>\n$90.15<\/td>\n($16)<\/td>\n<\/tr>\n<\/tbody><\/table><\/div>\n
AdjustedCostBase.ca<\/a> is a web application that performs all the necessary calculations for you. All you need to do is enter the details of each transaction. Although it\u2019s important to understand the concepts when calculating ACB, AdjustedCostBase.ca makes things less tedious and reduces the risk of human calculation error.\u00a0 Here are the results after entering the transactions from the example into AdjustedCostBase.ca:<\/p>\n
\"Transactions<\/a><\/p>\n
This overview is meant to be a general guideline, and will not apply in all situations.<\/p>\n
The following are some other details to consider:<\/p>\n