Essential
What is Adjusted Cost Base (ACB)?
Your Adjusted Cost Base is the cost of your investment for tax purposes. It starts with what you paid
and gets adjusted over time by reinvested distributions, return of capital, stock splits, and more.
Understanding ACB is crucial for accurately reporting capital gains and losses on your tax return.
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Understanding Adjusted Cost Base (ACB)
When you buy an investment in a non-registered (taxable) account in Canada, the Canada Revenue Agency (CRA)
requires you to track your Adjusted Cost Base (ACB). This is essentially your cost for
tax purposes, and it's used to calculate your capital gain or loss when you eventually sell.
Starting Point: Your Purchase Cost
Your ACB starts with what you paid for the investment, including any purchase commissions. For example,
if you buy 100 shares at $25.00 each plus a $9.95 commission, your initial ACB is:
Example: Initial ACB Calculation
100 shares x $25.00 = $2,500.00
Plus commission: $9.95
Total ACB: $2,509.95
ACB per unit: $25.0995
What Adjusts Your ACB?
Several events can change your ACB over time:
- Additional purchases: Buying more shares adds to your total ACB
- Return of Capital (ROC): ROC distributions reduce your ACB
- Reinvested distributions: DRIPs and reinvested dividends increase ACB
- Stock splits/consolidations: Change units but not total ACB
- Corporate reorganizations: Mergers and spinoffs may require ACB allocation
Why ACB Matters
When you sell your investment, your capital gain or loss is calculated as:
Capital Gain = Proceeds of Sale - ACB - Selling Costs
Important: In Canada, you must use the "average cost" method for calculating ACB on
identical securities. You cannot use FIFO (first-in, first-out) or specific identification methods
that are allowed in some other countries.
The Average Cost Method
When you buy the same security at different prices over time, you must calculate an average cost.
Each time you buy more shares, your ACB per unit is recalculated.
Example: Average Cost Calculation
Initial purchase: 100 shares at $25.00 = $2,500.00
Second purchase: 50 shares at $30.00 = $1,500.00
Total ACB: $4,000.00 for 150 shares
ACB per unit: $26.67
Return of Capital (ROC) Explained
Return of Capital is a type of distribution that represents a return of your original investment,
rather than income earned by the fund. It's not immediately taxable, but it reduces your ACB.
How ROC Works
When you receive an ROC distribution, you get cash (or reinvested units), but unlike dividends or
interest, this isn't treated as income. Instead, it reduces your cost base.
Example: ROC Impact on ACB
Original ACB: $10,000 (1,000 units at $10.00 each)
ROC distribution: $0.50 per unit = $500
New ACB: $9,500 ($9.50 per unit)
The Deferred Tax Effect
ROC isn't tax-free - it's tax-deferred. By reducing your ACB, you'll have a larger capital gain
(or smaller capital loss) when you eventually sell.
Tip: ROC can be beneficial because capital gains are taxed at a lower rate than
regular income, and you defer the tax until you sell. However, you must track your ACB accurately
to report the correct capital gain when you do sell.
Where to Find ROC Information
For Canadian mutual funds and ETFs, the fund company publishes annual tax information that breaks
down distributions into their components (dividends, interest, capital gains, ROC). This is typically
available on the fund's website and is also reported to CRA.
Negative ACB: If cumulative ROC exceeds your original investment, your ACB can
become negative. When this happens, the "excess" ROC is treated as a capital gain in the year received.
The Superficial Loss Rule
Canada's superficial loss rule (ITA 54) is designed to prevent investors from "selling at a loss"
and immediately buying back the same security just to claim the loss for tax purposes.
The 30-Day Rule
A superficial loss occurs when you sell a security at a loss and you (or an affiliated person):
- Bought the same security within 30 days before the sale, OR
- Buy the same security within 30 days after the sale, AND
- Still own the security at the end of the 30-day period after the sale
What Happens to the Denied Loss?
The good news is that denied superficial losses aren't lost forever. The denied loss is added to
the ACB of the replacement shares. This means you'll benefit from the loss when you eventually
sell those shares (assuming you don't trigger the rule again).
Example: Superficial Loss
Day 1: Sell 100 shares at $20 (purchased at $25) = $500 loss
Day 15: Buy 100 shares at $19
Day 31: Still own the 100 shares
Result: The $500 loss is denied and added to your new shares' ACB
New ACB: $19 + $5 = $24 per share
Affiliated Persons
The rule applies to purchases by "affiliated persons" including:
- Your spouse or common-law partner
- Corporations you control
- Trusts where you're a majority interest beneficiary
- Your RRSP, TFSA, or other registered accounts
TFSA/RRSP Warning: If you sell at a loss in your taxable account and repurchase
in your TFSA or RRSP within 30 days, the loss is denied permanently - it cannot be added to the
ACB of shares in a registered account.
Understanding Phantom Distributions
Phantom distributions occur when a fund distributes income that gets reinvested (or is paid then
immediately reinvested through a DRIP) but you still owe tax on the distribution.
How Phantom Distributions Work
Consider this scenario: You own units of an ETF that makes a $1.00 distribution. If you're enrolled
in a DRIP, that $1.00 is used to buy more units. You now have more units, but no additional cash.
The "phantom" aspect is that you owe tax on the $1.00 distribution even though you never received
cash. This can be frustrating, but there's a silver lining.
The ACB Benefit
When distributions are reinvested, your ACB increases by the amount reinvested. This means when
you eventually sell, your capital gain will be lower (or your loss higher) because of the higher ACB.
Tip: Keep careful records of reinvested distributions. Your broker's statements
may not always clearly track how much your ACB has increased from reinvestments, and you don't
want to pay tax twice - once on the distribution and again as part of a capital gain.
Year-End Distributions
Many ETFs and mutual funds make large year-end distributions. If you buy units in December just
before the distribution date, you might receive (and owe tax on) a distribution that includes
gains earned throughout the year - before you even owned the units!
Tax Tip: Be cautious about purchasing mutual funds or ETFs right before their
year-end distribution date. Check the fund's distribution schedule before making late-year purchases.
Introducing Our MCP Server for Claude Code
We're excited to announce the release of our Model Context Protocol (MCP) server for
ACB Platform. If you use Claude Code (Anthropic's CLI tool), you can now access ACB Platform's
full functionality directly from your terminal using natural language.
What is MCP?
The Model Context Protocol is an open standard that allows AI assistants like Claude to interact
with external tools and services. Our MCP server exposes ACB Platform's API as a set of tools
that Claude can use on your behalf.
What Can You Do?
With our MCP server, you can:
- Search securities - "Find the CUSIP for TD Bank"
- Calculate ACB - "Calculate ACB for CUSIP 891160509 with these transactions..."
- View distributions - "What ROC distributions did XIC have in 2024?"
- Manage portfolios - "Show my portfolios" or "Add BMO to my TFSA portfolio"
- Track favorites - "Add this security to my favorites"
Quick Setup
Getting started takes just a few minutes:
2. Install the MCP Server
Clone the repo and run the install script:
git clone https://gitlab.com/matthewlatimer/acb-update.git
cd acb-update/mcp-server
./install.sh
3. Restart Claude Code
The MCP server will be loaded automatically. Try asking Claude:
"Search for TD Bank securities on ACB Platform"
Available Tools
The MCP server provides 11 tools:
acbp_search_securities - Search by name, symbol, or CUSIPacbp_get_security - Get security detailsacbp_calculate_acb - Calculate ACB for transactionsacbp_get_distributions - View distribution historyacbp_list_portfolios - List your portfoliosacbp_get_portfolio - Get portfolio detailsacbp_list_calculations - View saved calculationsacbp_get_calculation - Get calculation detailsacbp_list_favorites - List favorite securitiesacbp_add_favorite - Add a security to favoritesacbp_account_info - View account information
Pro Tip: The MCP server uses your API key for authentication, so all your
calculations are saved to your account just like using the web interface.
Example Workflow
Here's how you might use the MCP server to calculate ACB for a stock you're selling:
Natural Language Example
"I bought 100 shares of TD Bank on Jan 15, 2023 at $85.50, and another 50 shares on
June 1, 2023 at $82.00. Now I want to sell 75 shares. What's my ACB per share and what
will my capital gain be if I sell at $90?"
Claude will use the MCP server to search for TD Bank, calculate
your ACB with ROC adjustments from our database, and give you a complete breakdown.
Requirements
- Claude Code (Anthropic's CLI tool)
- Python 3.8+
- An ACB Platform account with an API key
Ready to get started? Create your API key and check out our
MCP server documentation.