ACB (Adjusted Cost Base)

Your tax cost: what goes into the ACB

When you sell an investment in a taxable account, capital gains tax applies to the difference between what you sold it for and what it cost you. The ACB is the "what it cost you" side of that equation, and it is more than just the purchase price. It includes the price you paid plus the costs of acquiring the investment, such as trading commissions. For real property it also includes capital improvements, and for any investment it gets adjusted up or down over time by events like reinvested distributions and return of capital.

The formula at sale time is: capital gain = proceeds of disposition, minus outlays to sell (like the selling commission), minus ACB. Half of the resulting gain is added to your taxable income (as of July 2026). Get the ACB wrong and every other number downstream is wrong too.

Canada averages every lot: no picking your shares

This is the part that surprises people who know the US system. In the United States, an investor can often choose which specific lot to sell ("sell the shares I bought at $50, not the ones I bought at $30") to control the size of the gain. Canada does not allow that. For identical property, meaning the same security, the CRA requires one averaged ACB across every unit you own.

Buy 100 shares at $30 and later 100 more at $50, and you do not own two lots for tax purposes. You own 200 shares with an ACB of $40 each. The average spans all of your taxable accounts combined: the same stock held at two different brokerages is still one pool with one average cost. There is no lot-picking, no first-in-first-out, no "highest cost first". One security, one average.

Selling: how the ACB becomes a gain

When you sell everything, the full ACB comes off the proceeds. When you sell part of a position, you use the average ACB per share for the shares sold, and the remaining shares keep that same per-share ACB. Selling 100 of your 200 shares with a $40 average ACB removes $4,000 of ACB, no matter which "batch" you think you sold.

One interaction to know: if you sell at a loss and repurchase the identical security within 30 days, the superficial loss rule can deny the loss and add the denied amount to the ACB of the repurchased shares. The ACB is the ledger where that deferred loss lives until you sell again.

Return of capital: the quiet ACB eroder

Here is the adjustment most investors miss for years. REITs and many ETF and mutual fund distributions include return of capital (ROC): a portion of the cash paid to you that is not income at all, but your own capital handed back. ROC is not taxed when you receive it. Instead, it reduces your ACB by the same amount, which quietly increases the capital gain you will eventually report.

Ignore ROC for a decade and your records overstate your ACB, which means you understate your gain when you sell, and the CRA can reassess. Keep receiving ROC after your ACB reaches zero and something stranger happens: a negative ACB is treated as an immediate capital gain in that year, even though you sold nothing. Your T3 slip reports ROC in box 42; that number is your instruction to reduce the ACB.

The mirror-image error is just as common. Funds often pay reinvested (phantom) distributions, usually near year-end: taxable income that buys no new units and pays no cash. Each one increases your ACB. Miss those and you overstate your eventual gain, paying tax twice on the same growth. ROC pushes the ACB down, phantom distributions push it up, and only your own records catch both.

Who has to track it (hint: you)

Legally, the ACB is your responsibility, not your broker's. The "book value" shown in your account is a convenience figure, and it is often wrong in exactly the situations that matter: it usually ignores ROC and phantom distributions, and it frequently breaks when you transfer holdings between institutions or hold the same security in two places. Dedicated ACB tracking tools and spreadsheets exist, and for anyone holding REITs or ETFs in a taxable account they are worth the effort.

The flip side: inside registered accounts, the ACB is irrelevant. Nothing you sell in a TFSA, RRSP, FHSA, or RESP is a taxable disposition, so there is no gain to compute and nothing to track. ACB bookkeeping is a taxable-account problem only.