Adjusted cost base, explained for Canadian investors

If you hold investments in a non-registered account in Canada, adjusted cost base is the number that decides how much tax you pay when you sell. Get it wrong and you either overpay, or you underpay and carry the risk of a reassessment.

It is also the number most people never check until the year they need it.

What ACB actually is

Your adjusted cost base is the total amount you paid for a security, including commissions, divided across the units you hold. When you sell, your capital gain is the proceeds minus the ACB of the units sold, minus any selling costs.

The word doing the work is adjusted. The cost base is not simply what you paid on the day you bought. Several later events change it, and each one moves your eventual tax bill.

Canada pools, it does not stack

This is the part that surprises people arriving from a US context.

Canada uses the average cost method. Every unit of the same security you hold in non-registered accounts is pooled into one average, regardless of which account it sits in or when you bought it. If you own the same ETF at two different brokerages, the CRA treats it as one pool.

The US, by contrast, generally uses specific identification or FIFO, where individual tax lots retain their own cost. If you have read American investing content about "picking which lot to sell", that concept does not apply to your Canadian non-registered holdings.

One practical consequence: you cannot compute a correct ACB by looking at one account in isolation. A brokerage only sees the units it holds. If you hold the same security elsewhere, its number is arithmetically incapable of being right.

The four things that move your ACB

Buying more. A new purchase adds its cost, including commission, to the pool and raises or lowers the average.

Return of capital. Some distributions, common with REITs and certain ETFs, are classified as return of capital rather than income. They are not taxed when received — instead they reduce your ACB, which increases your eventual gain. These appear in box 42 of a T3 slip. If you have held a REIT for a decade and never adjusted for return of capital, your ACB is almost certainly overstated.

Reinvested distributions. When a distribution is reinvested, you paid tax on it in that year, so it increases your ACB. Phantom distributions — reinvested and immediately consolidated, so your unit count never changes — are the ones people miss, because nothing visible happens in the account. They also appear on the T3.

Corporate actions. Stock splits change the unit count and therefore the per-unit average. Mergers and spin-offs reallocate cost base between securities under specific rules.

Selling does not change your average cost per unit. It reduces the number of units in the pool at the existing average.

The superficial loss rule

If you sell at a loss and buy the identical security back within 30 days before or after the sale, the loss is denied and added to the ACB of the repurchased units instead.

The window is wider than most people assume. It counts purchases in any account you control, including registered accounts, and it extends to affiliated persons — a spouse, or a corporation you control. A loss sale in your non-registered account followed by a purchase inside your RRSP triggers the rule, and in that case the denied loss is simply lost, because there is no non-registered ACB to add it to.

Luum does not apply superficial loss adjustments. Its capital gains figures do not account for the rule, so if you have sold at a loss and repurchased within the window, verify the treatment yourself.

Why your brokerage's number may not be yours

Brokerages report a book value, and it is often labelled in a way that implies it is your ACB. It is a useful starting point and frequently not the same figure, because:

• it only reflects that one account;
• transferred-in positions often arrive with a cost base that was estimated, reset to the transfer-date price, or dropped entirely;
• return of capital is not always applied;
• corporate actions may be recorded inconsistently.

Your brokerage's T5008 and your own records are both inputs. The CRA holds you responsible for the figure you report, not your brokerage.

What to actually do

Keep the transaction history. Not the monthly statements — the trade-level record of every buy, sell, distribution and corporate action, for as long as you hold the security plus six years after you dispose of it.

Check your T3 slips for boxes 42 and 30 each year, and record the adjustment when it happens rather than reconstructing it a decade later.

If you hold the same security at more than one institution, maintain the pool yourself, because nobody else is positioned to.

Verify with the CRA or a qualified tax professional before you file.