Adjusted Cost Base: Keep Investment Records
Record purchases, commissions and reinvested distributions, then allocate each partial sale among the units.
In this article
Selling an investment held for years in a taxable account raises a question that looks banal: what did it cost? The adjusted cost base is rebuilt piece by piece, and every forgotten piece makes you overpay tax. Successive purchases add up, commissions included. Reinvested distributions, already taxed in the year they were paid, are purchases in their own right, and omitting them amounts to paying tax twice on the same money. Partial sales are allocated against the average cost of all identical units, never the lot of your choosing. Foreign-currency positions convert at the relevant dates' rates. The cost base displayed by the broker is a starting point, never the truth: transfers and reinvestments are sometimes missing, as the statement itself warns. This article details each component, the reconstruction of a neglected history and the ten-minutes-a-quarter register that spares you the archaeology.
Record every purchase with its fees
An investment's adjusted cost base is built purchase by purchase, and each line includes the amount invested plus the commission paid. That commission is part of the tax cost: forgetting it inflates the taxable gain by exactly that amount. Keep the register from the first transaction, in a simple spreadsheet: date, number of units, unit price, commission, running total cost. Reconstructing that register ten years later, when the sale happens and the return demands it, takes far longer. It is often impossible if the account changed brokers in the meantime.
Add the reinvested distributions
Every reinvested distribution is a new purchase, and it raises the adjusted cost base by the amount reinvested. Forgetting these reinvestments is the most common and most expensive error. A fund held fifteen years with distributions reinvested every quarter accumulates sixty invisible purchases. If you neglect that total, you declare a gain well above the real one and pay tax that was not owed. Reinvested distributions appear on the annual tax slips. Keep them for that reason, well beyond the usual retention periods.
Allocate the cost on partial sales
A partial sale does not attach to specific units: the tax cost is calculated on the average of all units held. Selling thirty units out of a hundred uses thirty percent of the accumulated total cost, and the rest of the cost stays attached to the seventy units left. That averaging surprises those who believe they can sell the most expensive units first. It also means you must update the register after each sale. Otherwise the next sale starts from an erroneous cost and the error repeats in every subsequent return.
Convert currencies at the exact dates
An investment denominated in a foreign currency is converted to Canadian dollars at two moments: at purchase, at the purchase day's rate, and at sale, at the sale day's rate. Using the same rate at both ends erases the currency effect, which is nevertheless fully taxable. Use the rates published by the central bank and keep them with each transaction. The broker's statement is not always enough: many present positions in the original currency and do not track the Canadian tax cost, leaving that responsibility entirely to the account holder. Keep the conversion source alongside the number, so you do not have to track it down years later.
Quebec scenario
An engineer in Sainte-Julie sells 200 units of an ETF held nine years in his taxable account, and a deceptively simple question comes up: what did these units cost? To answer honestly, he has to do a reconstruction he had never done. First the purchases: seven lots at different prices, commissions included in cost, each purchase adding to the total. Next the reinvested distributions, the classic trap. Every automatic reinvestment is a purchase, already taxed the year it was paid. Forgetting it in the cost means paying tax twice on the same money, and nine years had accumulated forty-three of them. Then the partial sales: his 2019 sale had to be allocated against the average cost base of all units, not the lot of his choosing, a method that recalculates the cost of what remains. A former U.S. position adds the question of currency: each purchase is converted at its own date's rate, not the rate on the day of sale. His broker displays a cost base, but the disclaimer at the bottom of the statement says what matters: institution transfers and some reinvestments can be missing. The figure is verified, not presumed. Three evenings of statements later, his file holds up and his declared gain drops $1,900 against the unverified number. He now updates the file at every transaction: ten minutes a quarter, against three evenings of archaeology.
Checklist
- Log every purchase with its commission
- Add every reinvested distribution to the cost
- Allocate partial sales against the average cost
- Convert currencies at the right dates' rates
- Treat the broker's figure as a starting point
- Check for missing transfers and reinvestments
- Update the register every quarter
- Rebuild neglected histories once
- Keep the statements beyond the sales
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