If you’re of a certain vintage, you’ll remember the 1991 hit song “O.P.P” by rap group Naughty by Nature. While I definitely jammed to this song back then and still do, as an investor, I’m more down with ACB than OPP nowadays, that is Adjusted Cost Basis. And you should be too if you invest in a taxable or margin account outside of your Tax Free Savings Account (TFSA) and/or Registered Retirement Savings Plan (RRSP).
What is Adjusted Cost Basis?
In the context of a stock, Adjusted Cost Basis (ACB) is the original purchase price adjusted for any paid commissions to purchase the stock and any future purchases or reinvested dividends of the same stock at a different price either higher or lower than what you first paid for the stock.
The original purchase price can also be adjusted based on several perhaps less common things, such as return of capital, reinvested capital gains distributions, and stock splits. This is especially true for Exchange Trade Funds (ETFs) given that they are more complex investing vehicles that can have these various adjustments such as return of capital or a return to an investor of a portion of their own invested capital or money. More about ACB and ETFs below.
Why should you care about ACB?
For starters, if you only invest in a TFSA and/or RRSP, you don’t need to worry about ACB. Go check out my March 2022 Dividend Update instead.
For everyone else, you should be keeping on top of your ACB for each stock you own. This is because outside of an RRSP or TFSA, your stock investment or purchases are going to be taxed on any investment increase or growth otherwise known as capital gains when the stock or stocks are sold. Capital gains tax is applied to the increase in value of the stock. To understand clearly what the increase in value of the stock or stocks is, we need to subtract the sale price minus the purchase price (if you buy a stock for $10 and it increases to $20 and you sell it, then you have a capital gain of $10). However it’s a bit more complicated than that.
The original price you pay for a stock is known as the “cost basis”. However, different things can impact the “cost basis” and we need to keep track of those things because it could impact the tax you pay and usually it results in less tax owing because these different things usually increase the “cost basis” and thus decrease the capital gains. If you’re like me and enjoy paying less tax, this is a good thing.
Does my brokerage calculate ACB for me?
Some brokerages explicitly tell investors to track ACB themselves as they don’t want any liability for potential future tax issues. I have taxable accounts with Wealthsimple, Questrade and Nest Wealth:
- Wealthsimple: According to Wealthsimple, ” Adjusted Cost Base (ACB) will be reported on your T5008 Statement in Box 20 and will be, to the best of our available information, accurate”. However, they note that, “Assets transferred to us from another institution may not have an accurate ACB, as this is dependent on the previous institution’s ACB tracking”.
- Questrade: According to Questrade, “To make sure you are accurately reporting your capital gains and losses in your tax return, it is your responsibility to keep track of your ACB for each of your securities and, if necessary, consult with your tax or accounting advisor.
Two very different approaches and perspectives. Understandably, Wealthsimple (or Nest Wealth) as a robo-advisor is actively making investments on your behalf based on the cash you contribute to the platform and as such, takes on more responsibility for ACB. On the other hand, Questrade takes absolutely no responsibility for the accuracy of the reported ACB amount in box 20 of your TS5008 form (more on this document later).
If you are a Wealthica user, this platform also calculates your ACB on your stocks. This saves a bunch of work on your end tracking your ACB although I’ve noticed on several of my stocks that had things happened to them such as being acquired by another company, Wealthica was unable to calculate ACB. Look under the “Power Ups” tab and then click on “Realized Gains” to see the ACB for each of your holdings. To read more about this, see: https://wealthica.com/blog/new-realized-gains-reports-power-adjusted-cost-base-acb/ .
(I use Wealthica everyday and I highly recommend it for my Canadian friends/readers. Use my promo code: WDDividendDaddy10 and get 10% off the yearly premium subscription).
How do I track my ACB?
One of my unwritten 2022 goals is to track my ACB on an annual basis. I know some investors who run a spreadsheet and after each trade, track the ACB for their investment. I’m not that person. I definitely have some catch up work to do that spans a few years. My bad.
First, I need to get an accurate picture of my buy and sell related to each stock. Let’s take $SJR.B (Shaw Communications) as an example. If you’re using Questrade as your brokerage, go to “Reports” then select “Trade Confirmations” and run a search for the stock. Be sure to remember that any reinvested dividends affect your ACB. This is what Questrade spits out for me:
I use the free tool available at www.adjustedcostbase.ca to track by ACB after obtaining the information above. I simply click “new transaction” and enter the stock name and/or symbol (note it should read SJR.B not SJB.TO which is a typo below but it doesn’t affect the calculations below), whether I made a buy or sell, date, and price either in total or per share and enter the # of shares and my commission (or what it cost me from for my brokerage to perform the task.
As you can see, on April 16, 2020, I initially bought 200 shares of $SJR.B at $22.10 a share ($4,420 total) and paid $4.95 in commission for the purchase. My cost basis of $4,420 for this purchase increased by $4.95 to $4.424.95.
I then subsequently bought another 200 and 100 shares on separate occasions and then sold 100 shares. Each transaction is entered separately into the online database at www.adjustedcostbase.ca. (For those interested, with the announced purchase of Shaw by Rogers, my thoughts as an investor can be found in my blog post, “Rogers buying Shaw! What am I doing as a Shaw Investor?”).
The end result is that www.adjustedcostbase.ca provides the following current ACB and ACB per share for each stock and related transaction(s) you enter into the online platform.
How is this useful at tax time?
I just filed my 2021 taxes. It was a laborious 8+ hour affair! Friendly reminder: taxes are due by the end of April in Canada.
In the above example, because I sold 100 shares of $SJR.B stock in 2021, I received from my brokerage a T5008 form which is a Statement of Securities Transactions. Below is what appeared on my T5008 for the sale of 100 shares of $SJR.B in 2021.
Box 20 is the most important box below. Why? The Canada Revenue Agency (CRA) notes explicitly on the back of your T5008 form that, “The amount in box 20 may or may not reflect your adjusted cost base (ACB) for the purpose of determining the gain or loss from the disposition of the security. You are required to make the adjustments, as needed, to the amount indicated in box 20, at the time of determining and reporting your gain or loss from the disposition”.
Notice that Box 20 below notes my ACB of $2,221.62. However, this figure is inaccurate. My actual ACB is $1,785 or my current ACB/share from www.adjustedcostbase.ca (see image labelled “Information for $SJR.B” above) of $17.85 per share multiplied by 100 shares I sold or in other words ($17.85 X 100 = $1,785).
Having an accurate Box 20 or your ACB is important because ACB is used to determine your gain (or loss) from the sale of a stock. You pay capital gains on your gain from a sale of a stock so if you want to pay the right amount of tax, and often less tax, you need to make sure that Box 20 is accurate.
What about ETFs?
ACB is important for ETFs because they can be more complex and can have different forms of adjustments as noted above. These adjustments can be quite complex (at least for me), so I don’t mind paying for some expertise here.
According to www.adjustedcostbase.ca, for a cost of $49 per year, among other features, you can get streamlined import of return of capital and phantom distributions for ETF’s and public mutual funds. See table below for other pay features.
Before you pay the $49 fee, you check if your ETFs are covered by the service. Data for most Canadian publicly traded ETF’s and trusts is available on the www.adjustedcostbase.ca platform from 2007 onwards. You can check whether data is available for a particular fund by initiating the process described here (with the limitation that you won’t be able to complete the data import process before upgrading):https://www.adjustedcostbase.ca/blog/streamlined-import-of-return-of-capital-and-phantom-distributions-and-for-exchange-traded-funds-etfs-publicly-traded-mutual-funds-and-trusts/
All of this too much?
All of this sound too much for you? I get it. It’s a task I avoid doing much like my taxes until the end of April creeps up on me, and I have to do it. I guess I could pay an accountant to worry about all of this?
Do you track your ACB yourself? Tell me in the comments below.