Calculating ACB of your DRIPs
For Canadian income tax purposes, you need to know the "Adjusted Cost Base" (ACB) of any capital properties you own, including shares you own outside of a tax sheltered account, such as a RRSP, TFSA, RESP, etc... And since shares are considered equivalent units, you also need to know your "Adjusted Cost Base per Share" (ACB/Share).
The Canadian Revenue Agency's definition of ACB is:
"The cost of a property plus any expenses to acquire it, such as commissions and legal fees." (SOURCE)
For DRIPers (us who DRIP invest) 'cost' means any money for:
Buying your first share, by either method (but not the 'thank you' gift if a private exchange)
Any commissions or fees you paid to a brokerage if you used the 'broker method' in the Canadian DRIP Primer
Optional cash purchases through the Share Purchase Plan
Dividends received which YOU reinvested through the DRIP.
Common expenses to to buy shares, such as postage or courier expenses (with receipts)
ACB is really simple: At any point in time you need to know how much money YOU invested in your shares. For ACB/Share is that total amount divided by the number of shares you own at that point in time.
So a typical summary of costs for a DRIPer may look like this:
(this spreadsheet is available on the DRIP Log page, minus the running total calculations)
In this example, the investor started his DRIP using the broker method and bought 1 share on the open market, then ordered a stock certificate to have the share registered in her name. Following that, she made some optional cash purchases and had some dividends reinvested.
Note: The different in price for the latter reinvested dividends was due to a discount being offered by the corporation, and the investor chose to courier the March 1st OCP and paid $5.95 to do that.
So as of March 2007 she had 22.010 shares and it cost her $942.77 ($858.37 invested + $84.40 to acquire those shares). So her ACB was $942.77 and her ACB/Share is $42.83 per share. Easy!
Now from this point she can do 3 things:
Continue as is having dividends reinvested and making optional cash purchases (which is usually why you start DRIPing in the first place)
Sell all of her shares
Sell some of her shares
1.) Just continue on as normal with the spreadsheet, taking note of cash purchases, reinvested dividends and any expenses.
2.) A DRIPer wouldn't normally do this, but if you had to sell an entire position some Transfer Agents will sell whole shares for you at a nominal fee, or you could request a share certificate for all whole shares (in this example 22), deposit them in a brokerage account and, pay a commission and sell them on the open market.
You would then use the ACB above of $942.77, any fees/commissions to sell ("outlays and expenses") your shares, and the total amount of money received from the sale ("proceeds of disposition") to fill out Schedule 3 for income taxes.
3.) A DRIPer would do this, such as selling 1 share to someone else to allow them to start a DRIP ("private exchange" from DRIP Primer) or depositing some in a TFSA as described in the DRIP TFSA Strategy.
2 things need to be done to properly claim and capital gains (losses) and maintain an accurate ACB going forward.
Similar to #2 above, except the ACB would be calculated using the ACB/Share at the moment of transfer/sale, in the example above that's $42.83, and multiply that by the number of shares being transferred/sold, so we'll say 1. In a private exchange and when depositing in-kind with the broker for a RRSP/TFSA/ETC... there should be no fees. so if the current share price was greater than $42.83 then there would be a capital gain, and if it was less there would be a capital loss.
To properly maintain your spreadsheet's ACB going forward, in the line for your Sale or Deposit in kind, you would need to subtract obviously the number of shares transferred out, and that number multiplied by the ACB/Share at that time since the transfer doesn't affect the ACB/Share for the remaining shares.
In the Event of a Share / Stock Split
Companies will on occasion announce a stock split, for which there could be several reasons. But ultimately the value of each share is reduced by a fraction, and the # of shares is increased by the inverse.
Example:1 share is trading at $100, and splits by a factor of 1/2 to $50 but each share is now worth 2/1, or double.
A share split is generally not a taxable event, nor does it change your returns or adjusted cost base (ACB) since the amount of YOUR money invested hasn't changed. Your ACB per Share will have changed since the # of shares has changed.
To see how this would be calculated, see the DRIP Log page for an example.