Although the cash may never physically pass through your hands or even get deposited into your account, a reinvested distribution is seen as two distinct transactions from a tax standpoint.<\/p>\n
For calculating ACB, the reinvestment of the distribution is equivalent to a buy transaction<\/a>.\u00a0 The total ACB increases by the amount reinvested as follows:<\/p>\n A reinvested distribution typically doesn’t involve any brokerage commission or any other transactions costs.\u00a0 But if you do incur these costs they should be added into the ACB.<\/p>\n Example 1:<\/strong><\/span> Let’s assume that you own 1,060 units of XYZ Canadian Equity Fund with a total ACB of $22,684.00 and receive a distribution of $321.16, which is entirely reinvested in 12.95 additional units of the fund.\u00a0 The ACB would become:<\/p>\n Now, a total of (1,060.00 + 12.95 = 1072.95)\u00a0 units are owned.<\/p>\n It’s important to recognize that in addition to the ACB adjustment, the distribution is taxable in the year of the distribution.\u00a0 The taxation of the distribution will depend on whether it’s in the form of interest income, eligible dividend income, non-eligible dividend income, foreign income, capital gains, etc.\u00a0 The tax breakdown should be included on the annual T3 and T5 slips sent by your financial institution, or you can look up this information yourself<\/a>.\u00a0 The ACB adjustment, however, will likely not be provided for you.<\/p>\n If all or a portion of the distribution is in the form of return of capital<\/a>, an additional adjustment to ACB must be made.\u00a0 Suppose that 25% of the $321.16 distribution is return of capital.\u00a0 In this case, the ACB must be adjusted (decreased) based on this amount:<\/p>\n Note that if you’re using a value for return of capital per share, this amount should be multiplied by the number of shares owned before the reinvested distribution (1,060 shares).<\/p>\n Sometimes when you elect to have distributions reinvested, you only receive whole shares, and the remainder is distributed in cash.\u00a0 This is often the case with a synthetic DRIP at a brokerage.\u00a0 In this case, only the reinvested portion is added to find the new ACB.<\/p>\n Example 2:<\/strong><\/span> Let’s alter the above example such that the $321.16 distribution is reinvested in 12 additional units and you receive $23.56 in cash.\u00a0 The price per unit would therefore be (($321.16 \u2014 $23.56) \/ 12 = $24.80) and the reinvested amount would be ($321.16 \u2014 $23.56 = $297.60).\u00a0 In this case the ACB becomes:<\/p>\n Let’s assume again that 25% of the $321.16 distribution is return of capital.\u00a0 In this case, the ACB must still be adjusted (decreased) based on the amount:<\/p>\n Note that the effect of the return of capital is the same regardless of whether the distribution is received as cash, fully reinvested, or partially reinvested.<\/p>\n When you’re enrolled in a dividend reinvestment plan, extra work is required to accurately track ACB.\u00a0 This can become a tedious chore, especially when distributions occur monthly.\u00a0 Many investors choose not to participate in DRIPs simply because of the headaches involved with the ACB calculations.<\/p>\n Using AdjustedCostBase.ca<\/a> can alleviate the pain in tracking ACB caused by frequent and persistent reinvested distributions.\u00a0 AdjustedCostBase.ca is a free web application that allows you to enter transactions, and the ACB and capital gains are calculated for you.\u00a0 This saves a lot of time, and allows you to base your decision to enroll in a DRIP on your investing needs rather than your desire to avoid the extra work.<\/p>\n For Example 1<\/span><\/strong> from above, you would add a new “Reinvested Dividend” transaction, setting the appropriate amounts for the reinvested amount and additional shares received:<\/p>\n You could also use a “Buy Transaction” type with a total amount of $321.16 for 12.95 shares and the effect will be exactly the same.\u00a0 Using a “Reinvested Dividend” transaction, however, makes it easy to see which transactions are related the DRIPs and which are normal purchases.<\/p>\n Next, you would need to create another transaction for the return of capital:<\/p>\nNew ACB = (Previous ACB) + (Total Reinvestment)\r\n = (Previous ACB) + ((Additional Shares Received) x (Cost Per Share of Additional Shares Received))<\/pre>\n
New ACB = $22,684.00 + $321.16\r\n = $23,005.16<\/pre>\n
New ACB = $23,005.16 \u2014<\/i> ($321.16 x 25%)\r\n = $22,924.87<\/pre>\n
New ACB = $22,684.00 + ($321.16 \u2014 <\/i>$23.56)\r\n = $22,981.60<\/pre>\n
New ACB = $22,981.60 \u2014<\/i> ($321.16 x 25%)\r\n = $22,901.31<\/pre>\n
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<\/a><\/p>\n![\"Transactions](\"https:\/\/www.adjustedcostbase.ca\/blog\/wp-content\/uploads\/transactions_example_1.png\")
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