In order to calculate capital gains and losses, you need to understand the concept of Adjusted Cost Base (ACB). Here’s a look at its definition, how to calculate it and related topics.
Adjusted Cost Base
The ACB of an asset is the price you paid to acquire it. Additionally, you can usually include capital costs such as the cost of additions or improvements as part of an asset’s ACB. For example, if you bought a building for $100,000 and you paid $50,000 to add an addition to it, your ACB is $150,000.
In contrast, you cannot add current costs the ACB. Generally, current costs are expenses that you incurred by running your business or maintaining your asset. Unlike capital costs, they aren’t related to assets that endure but instead to items that are used as you purchase them. Monthly electricity bills or small repair costs fall into this category.
For example, if you purchase an HVAC system for a building you own, the cost of that system is a capital cost that you can add to the asset’s purchase price to calculate ACB. However, expenses you incur to service your building’s HVAC unit are current costs and not used to calculate the asset’s ACB.
Outlays and Expenses
When calculating your capital gains or losses, you need to know your asset’s ACB, as well as any outlays or expenses incurred to buy this asset. Outlays and expenses can include finder’s fees, commissions, broker’s fees, surveyor’s fees, legal fees, advertising costs and transfer taxes.
If you are trying to calculate your capital gains or losses on a foreign asset, you need to convert the proceeds of the disposition, the asset’s ACB, and any purchasing expenses incurred from the foreign currency of the transaction to Canadian currency.
However, you should not convert all of these figures using the same exchange rate. Instead, use the exchange rate in effect the day the transaction occurred for each amount.
For example, when converting the ACB, use the exchange rate on the day you acquired the property. Similarly, when converting the proceeds of the disposition, use the exchange rate from the day you disposed of the asset.
Fair Market Value
In some cases, when calculating your capital gains or losses, you should not use the actual amount that you earned from selling your asset. Instead, you must use its Fair Market Value.
In particular, if you sell an asset for less than its FMV to someone who is not at arm’s length from your or if you give it away, you need to calculate your capital gain using the FMV instead of the proceeds that you earned.
However, this does not apply to gifts that you received. If you received a capital asset for free as a gift, you would use $0 as its ACB. You would not use its FMV. If applicable, you can add the cost of additions or other capital costs to the asset’s ACB.