Calculating Capital Gains on Stocks Using Adjusted Cost Base (ACB)

What Are Capital Gains?

Investing in securities such as stocks, bonds, and mutual funds can offer the potential for significant financial growth, but it also comes with the responsibility of understanding how capital gains and losses work. When you sell an investment for more than you paid, the profit is considered a capital gain. Conversely, selling for less results in a capital loss. The adjusted cost base (ACB) is a critical factor in calculating these amounts, as it determines the true cost of your investments and, in turn, your taxable gains or deductible losses.

Key Point: A capital gain occurs when you sell an investment for more than you paid (the ACB), and a capital loss occurs when you sell for less.

Why the ACB Matters. For investors using non-registered accounts, tracking the ACB of each security is essential. Unlike registered accounts such as TFSAs, RRSPs, and FHSAs, which do not incur capital gains, non-registered accounts require ACB tracking to properly calculate capital gains and losses. This becomes especially important when trading the same security across multiple brokerages, as the Canada Revenue Agency (CRA) requires you to calculate the ACB for all identical securities you own, regardless of where they are held. Brokerages cannot account for assets held elsewhere, and transferring investment accounts between brokerages can further complicate ACB tracking, as transaction histories can be impacted in the process.

This article assumes that the gains and losses from the sale of securities are treated as capital gains and losses, not business income (which can occur in specific scenarios). Determining whether your trading activity is classified as business income is a separate issue beyond the scope of this discussion.

Key Point: All purchases of the same security (across any brokerages) form a single ACB that must be tracked together.

When Do You Have Capital Gains or Losses?

Typically, you will have a capital gain or loss when you dispose of a security, including selling, transferring or giving away securities. Buying stocks or bonds is not a taxable event, as you only realize a capital gain or loss when you dispose of the investment. There are also situations where you may be "deemed" to have disposed of a capital property thus triggering a capital gain or loss, such as upon death or emigration out of Canada, which are beyond the scope of this article. Be aware of Canada’s “superficial loss” rules: if you or an affiliated person (e.g., spouse) repurchases the same security within 30 days of selling it at a loss, the loss may be denied or deferred.

Key Point: You only realize a capital gain or loss when you dispose of capital property.

Calculating Capital Gains With Adjusted Cost Base

In order to calculate a capital gain or loss, you need to know the adjusted cost base (ACB) of the security. The ACB is generally the total cost to acquire the security, including any expenses incurred to acquire it, such as commissions and legal fees.

Adjusted cost base is tracked as a single cost for each set of identical properties. Most commonly this would apply to shares of the same company or ETF where a single ACB is calculated for all shares (even if they're held at different brokers or purchased at different times). Meaning you must track the ACB for each security you own.

It is not necessary to track the ACB of any securities held in registered accounts like RRSPs, TFSAs, or RESPs. These accounts are tax-sheltered and do not trigger capital gains or losses. However, if the same security is held in both registered and non-registered accounts, the ACB must still be tracked for the non-registered account transactions of that security.

Adjusted cost base is continually calculated for each security until all units are disposed of. Additionally, when calculating capital gains on securities in non-registered accounts, remember that if you hold foreign stocks, you must convert all amounts into Canadian dollars, typically using the exchange rate on each transaction’s settlement date.

Key Point: The ACB is the total cost of the property, including any expenses incurred to acquire it, such as commissions and legal fees.

Key Steps in ACB Tracking

Tracking Adjusted Cost Base

Adjusted cost base for securities is generally tracked as follows:

• Purchases: Buying shares of a security increases the ACB by the total cost of the security, including broker commissions.
• Sales: Selling shares of the security decreases the ACB by the number of shares sold multiplied by the current ACB per share.

Based on these rules, the ACB on a per-share basis only increases with purchases and does not change with sales. The total ACB decreases with sales based on the number of shares sold and the existing ACB per share.

Tracking Capital Gains or Losses

Selling shares of a security results in a capital gain or loss equal to the net proceeds of the sale minus the decrease in ACB (as calculated above). Net proceeds is the total amount received from the sale, less any expenses incurred to sell the security, such as broker commissions. If the resulting amount is positive, you have a capital gain. If it is negative, you have a capital loss.

• Calculation: Proceeds of sale - selling commissions - decrease in ACB = Capital gain or loss

Calculation Examples

Assume that you currently own no shares of XYZ Corp. You purchase 100 shares at $100 per share, incurring $10 in broker commissions. The purchase settles on February 1, 2025. Later, you sell 25 shares of XYZ Corp. in a transaction that settles on March 1, 2025, at $150 per share, incurring $10 in broker commissions. These transactions are illustrated as follows:

As noted above, the purchase transaction simply increases the ACB by the net cost of the transaction. The ACB per share increases from purchase transactions. Conversely, the sale transaction does not change the ACB per share, it reduces ACB based on the number of shares sold using the existing ACB per share. Only purchase transactions increase the ACB per share.

Additional Transactions

Next, assume that you make two more purchases. The first purchase settles on April 1, 2025, where you acquire 50 shares of XYZ Corp. at $160 per share, incurring $10 in broker commissions. The second purchase settles on May 1, 2025, adding 25 more shares at $170 per share, also incurring $10 in broker commissions. Finally, with the stock underperforming, you sell 100 shares of XYZ Corp., in a transaction that settles on December 1, 2025, at $100 per share, incurring $10 in broker commissions. These transactions are illustrated as follows:

Again, each purchase increases the ACB by the net cost of the transaction. The ACB per share increases from purchase transactions. The December 1, 2025 sale transaction again does not change the ACB per share. However, the number of shares sold multiplied by the existing ACB per share (100 shares x $131.85) is higher than the net proceeds of the sale ($9,990), resulting in a capital loss. After the sale, you are left with 50 shares of XYZ Corp. still with an ACB of $131.85 per share.

Summary of Calculation Steps:

• Step 1: For purchases, add the total cost (including commissions) to the ACB.
• Step 2: Maintain the same ACB per share when you sell—just reduce the total ACB proportionately based on the number of shares sold.
• Step 3: Calculate your capital gain or loss by comparing the net sale proceeds to the portion of the ACB allocated to those sold shares.

Taxation of Transactions

For the tax purposes, capital gains are taxed at a lower rate than regular income where 50% of the capital gain is taxable and included in taxable income. Likewise, 50% of capital losses can be used to offset capital gains from the same tax year (or carried back or forward to other tax years). Additionally, for financial securities, the settlement date of the transaction, which is later than the date the trade is made, is used to determine the tax year in which the capital gain or loss is realized. Currently in Canada and the U.S., settlement dates are one business day after the trade (referred to as T + 1). For instance, if you executed a trade on December 29, it typically settles in January of the following tax year, which can affect which year’s tax return you report it on.

Key Point: Only 50% of a capital gain is taxable, and only 50% of a capital loss is deductible. The settlement date determines the tax year for the transaction.