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What is meant by “adjusted cost base”, and what does it mean to me as an investor?

"Adjusted cost base" sounds technical, but it is actually a simple calculation used to determine the cost of an investment. Revenue Canada requires investors to use the adjusted cost base (ACB) when calculating capital gains or losses for tax purposes.

The "cost base" of an investment is the initial purchase price plus any related costs, such as commissions or fees. The cost base may never change if there are no additions or disposals ("redemptions" in the case of mutual funds). However, when changes are made; for example, in the case of monthly purchase plans through which the investor purchases subsequent shares or units of a mutual fund at different prices, then the cost base must be "adjusted" to reflect the new cost base of the investment for tax purposes. For example, suppose 1,000 units of a mutual fund are purchased for $20.00 per unit. A further 500 units are later purchased at $24.00 per unit. The new cost base per unit would be $21.33, calculated as:
Units Price per Unit Cost Cost Base
Initial Purchase 1000 $20.00 $20,000 $20.00
Later Purchase 500 $24.00 $12,000
Total Holding 1500 $32,000 $21.33
The calculation is the total cost of acquisition ($32,000) divided by the total number of units held. (1500) 32000 / 1500 = $ 21.33 If 200 units are then sold at $23.00, the ACB used to calculate the capital gain or loss is $21.33, even though the unit price of the most recent purchase was $24. Based on the ACB, there would be a capital gain of $334, calculated as:
Units Price per unit Cost
Redemption 200 $23.00 $4600
Cost 200 $21.33 $4266
Capital gain: $334 The calculation is the proceeds from redemption ($4600) minus the cost of purchase ( $4,266) using the adjusted cost base per unit (21.33).