Calculating your adjusted cost base (ACB) is necessary to determine the true cost of your investments for capital gains and losses. If you want a good idea of what kind of returns you are really getting, you need to figure out your adjusted cost base. And, perhaps more importantly, the CRA requires this calculation to be used for income taxes in relation to capital gains and losses. If you want to make sure you stay in the good books with the CRA, you need to make sure you understand how to perform this calculation.

The adjusted cost base is calculated by of adding in the cost you paid to purchase all of your investments into a certain stock or mutual fund. When you consider your ACB, you also need to make sure that you are including any reinvested distributions, as well as any commissions or fees incurred to purchase that stock or mutual fund. You want to make sure that all of your costs are represented. Your total cost is then divided by the total number of shares or units you own.

For example, say you buy 500 shares in a company for \$15 each. Later, the stock price falls so you decide to  buy 200 more shares in that company at \$12 each. You also have to pay a commission of \$20 for each transaction.

500 x \$15 = \$7,500

200 x \$12 = \$2,400

2 x \$20 =\$40

\$7,500 + \$2,400 + \$40 = \$9,940

The total cost of your investment is \$9,940. Now you divide that amount by the 700 shares that you own. The result is an ACB of \$14.20 per share

In this example, your adjusted cost base is \$14.20. Capital gains or

capital losses are then simply calculated as the difference between the ACB and the sale price minus commissions.

Continuing with the example above, let’s see what would happen if you were to sell 100 shares for \$15:

Sell 100 x \$15 (\$1,500)  – \$20 for the commission = \$1,480

ACB 100 x \$14.20 = \$1,420

As you can see, you have a capital gain of \$60. That is the amount on which the CRA will tax you.

But what if you end up selling for less than the ACB of \$14.20 a share? Below, you can see the result if you were to sell 100 shares for \$13:

Sell 100 x \$13 (\$1,300)  – \$20 for the commission = \$1,280

ACB 100 x \$14.20 = \$1,420

Now you have a capital loss of \$140. You can use that loss to offset capital gains you might have, lowering your investment income for tax purposes.