Overview
When investing or making trades in a taxable (or non-registered) account, you may realize what are known as “capital gains” or “capital losses”. This is a fancy way of saying you made money, or lost money, on a trade. In short, if you sold shares for more than you paid for those shares, you’ll have a capital gain; if you sold shares for less than you paid for those shares, you’ll have a capital loss.
In this article, we will go over some basic concepts on how to calculate your capital gains/losses in your non-registered account (capital gains do not need to be considered in registered accounts like TFSA, RRSP, FHSA, and RESP).
Basic example:
Buy
Suppose you buy 100 shares of ABC stock for $10/share which settles January 10, 2023.
- Your cost base will be 100 shares * $10/share = $1,000.
- Your cost base per share would be $1,000/100 shares owned = $10/share.
If you pay commissions for trades, you can include this in your cost base as well, but you won’t incur commission on trades with Wealthsimple.
Settlement date | Transaction type | Shares bought/sold | Price per share | Proceeds of transaction | Cost base of transaction | Capital gain or loss | Share balance | Total cost base | Cost base/share |
January 10 | Buy | 100 | $10 | - | $1,000 | - | - | - | $10 |
Sell
Suppose you sell 10 of your ABC shares for $11/share which settles on February 1, 2023. Your proceeds from this sale are 10 shares * $11/share = $110. However, you don’t pay tax on that $110 sale. We first need to determine the cost base of the shares sold.
Your cost base/share before this sale was $10/share, so we simply multiply this number by the number of shares sold: $10/share * 10 shares sold = $100 cost base for the sale. The difference between your proceeds and your cost base for that sale is your gain or loss: $110 - $100 = $10 capital gain.
Lastly, only half of your capital gain is taxable, so $5 will be added to your income (our tax software will do this halving for you automatically).
Settlement date | Transaction type | Shares bought/sold | Price per share | Proceeds of transaction | Cost base of transaction | Capital gain or loss | Share balance | Total cost base | Cost base/share |
January 10 | Buy | 100 | $10 | - | $1,000 | - | 100 | $1,000 | $10 |
February 1 | Sell | 10 | $11 | $110 | $100 | $10 | 90 | $900 | $10 |
You may have noticed that our cost base/share hasn’t changed, it’s still $10/share. This is always the case for any sales you make. Your cost base/share will only change when you buy more shares (or either of the two advanced transactions listed in the below section, which we can ignore for now).
Buy more
Let’s buy 50 shares of ABC at $12/share, settling on March 1, 2024. 50 shares * $12/share = $600 gets added to your total cost base. Now you have a total cost base of $900 + $600 = $1,500, and you own 90 + 50 shares = 140 shares. Our new cost base/share = $1,500/140 = $10.714/share (the more places after the decimal the better, but 2 or 3 should be fine. Keeping it as $1,500/140 is most accurate).
Settlement date | Transaction type | Shares bought/sold | Price per share | Proceeds of transaction | Cost base of transaction | Capital gain or loss | Share balance | Total cost base | Cost base/share |
January 10 | Buy | 100 | $10 | - | $1,000 | - | 100 | $1,000 | $10 |
February 1 | Sell | 10 | $11 | $110 | $100 | $10 | 90 | $900 | $10 |
March 1 | Buy | 50 | $12 | - | $600 | - | 140 | $1,500 | $10.714 |
Sell more
It’s now April and you need to sell some shares to pay for your summer vacation, but market prices have gone down. Settling on April 10, you sell 70 of our shares of ABC at $10/share. Our proceeds are 70 shares * $10/share = $700. Our cost base for this sale is 70 shares * $10.714/share (or $1,500/140) = $750. The difference between these amounts is $50; since the cost is higher than the proceeds, you have a capital loss.
Settlement date | Transaction type | Shares bought/sold | Price per share | Proceeds of transaction | Cost base of transaction | Capital gain or loss | Share balance | Total cost base | Cost base/share |
January 10 | Buy | 100 | $10 | - | $1,000 | - | 100 | $1,000 | $10 |
February 1 | Sell | 10 | $11 | $110 | $100 | $10 | 90 | $900 | $10 |
March 1 | Buy | 50 | $12 | - | $600 | - | 140 | $1,500 | $10.714 |
April 10 | Sell | 70 | $10 | $700 | $750 | -$50 | 70 | $750 | $10.714 |
This $50 capital loss will be used to reduce other capital gains you incurred this year. Since you have a $10 capital gain from February 1, that will be reduced to zero, and you still have $40 in capital losses to use for any future gains this year. If no further gains happen, you can carry back the $40 to any of the three prior years if you had capital gains in those years to get a refund from a prior year, or you can choose to carry forward the capital loss indefinitely until you choose to apply it to a particular year.
Advanced transactions
Generally, these only apply to mutual funds or exchange-traded funds (ETFs). The first is called return of capital.
Return of capital
Sometimes part of your distribution you receive from mutual funds or ETFs are not income from the investments within the fund, but rather just a portion of your original investment back. This return of capital is not taxable when you receive it, and is generally shown in box 42 of your T3 slip. Simply take the amount shown in this box (or the individual amount for each fund from your T3 Statement if you hold multiple funds), and reduce your cost base by this amount.
From the above example, in April we had a $750 total cost base. If ABC was an ETF instead of a stock, and the return of capital from box 42 of your T3 slip was $5 (it usually is pretty low compared to your share value), you’d simply reduce your total cost base: $750 - $5 = $745. The number of shares you own stays the same, so your cost base/share will change too. That’s it though, no capital gains or losses from this transaction. The eventual tax effect from this is that future sales of the stock will have a bigger gain, or smaller loss, compared to if the return of capital didn’t happen. In exchange for that eventuality, you get a little extra cash today.
Settlement date | Transaction type | Shares bought/sold | Price per share | Proceeds of transaction | Cost base of transaction | Capital gain or loss | Share balance | Total cost base | Cost base/share |
January 10 | Buy | 100 | $10 | - | $1,000 | - | 100 | $1,000 | $10 |
February 1 | Sell | 10 | $11 | $110 | $100 | $10 | 90 | $900 | $10 |
March 1 | Buy | 50 | $12 | - | $600 | - | 140 | $1,500 | $10.714 |
April 10 | Sell | 70 | $10 | $700 | $750 | -$50 | 70 | $750 | $10.714 |
December 31 | Return of capital | - | - | - | $5 | - | 70 | $745 | $10.643 |
Reinvested capital gains distribution
You may have noticed sometimes on your T3 slip that you’ll have an amount in box 21 for capital gains distribution, even though you did not receive that much in cash. This is known as a non-cash distribution or a phantom distribution. It means that within the mutual fund or ETF a capital gain was realized, but the fund used the proceeds to buy more stock, rather than give the unit holders the cash.
While this does result in a taxable amount on your slip, don't worry. Since a capital gain was realized and more stock was purchased, your total cost base goes up. Suppose your T3 slip (or T3 Statement) has a footnote saying that of the $200 in box 21, $20 of it was non-cash or reinvested. You would simply increase your total cost base by this amount. The resultant increase to your total cost base will lower any future gains related to this stock, or increase their loss. This is in exchange for having to pay some tax on the transaction this tax year.
Settlement date | Transaction type | Shares bought/sold | Price per share | Proceeds of transaction | Cost base of transaction | Capital gain or loss | Share balance | Total cost base | Cost base/share |
January 10 | Buy | 100 | $10 | - | $1,000 | - | 100 | $1,000 | $10 |
February 1 | Sell | 10 | $11 | $110 | $100 | $10 | 90 | $900 | $10 |
March 1 | Buy | 50 | $12 | - | $600 | - | 140 | $1,500 | $10.714 |
April 10 | Sell | 70 | $10 | $700 | $750 | -$50 | 70 | $750 | $10.714 |
December 31 | Return of capital | - | - | - | $5 | - | 70 | $745 | $10.643 |
December 31 | Reinvested capital gains | - | - | - | $20 | T3 slip | 70 | $765 | $10.929 |
The nice thing about all of this cost base business is that Wealthsimple does all these calculations for you. The book value/cost base you will see on your account statements will eventually include all of the above.
For reinvested capital gains or return of capital, ETF fund managers generally don’t inform institutions of the income composition of their ETF distributions until February 28 of the following year. This information is first used to prepare your T3 tax slips, and then subsequent to tax season in May we use this information to retroactively make any necessary book cost adjustments to your positions.
If you hold stocks, your book values will always be accurate for your investments since they won’t have return of capital or reinvested distributions; for ETFs or mutual funds, if applicable you will see book cost adjustments related to ROC and non-cash distributions on your May statement of the subsequent year.
Summary
Transaction | Capital gain/loss | Total cost base | Cost base per share | Notes |
Buy | No | Increase | Depends | Cost/share goes up when buy price is higher than your old cost/share; and vice versa. |
Sell | Yes | Decrease | No change | - |
Return of capital | No | Decrease | Decrease | Gain if ACB is below $0 |
Reinvested capital gains | Yes (on slip) | Increase | Increase | - |
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