Tips to Grow Series- #2

When do I have a capital gain and what is an ACB?
(This is for Non-Registered Accounts only)

When you sell an investment that has increased in value, you may realize a capital gain. As an investor, you realize this gain when you sell all or part of your investment. The gain is calculated when you subtract the selling price of the investment from your ACB (Adjusted Cost Base). The ACB isn’t always the purchase price but is the amount of the investment that has already been taxed. If you’ve received a distribution from your investment at any point when you have owned it, you will have been taxed on this in the year you received it. This will then increase your ACB. This prevents you from being taxed twice on a gain.

You may also incur a capital gain if a fund manager sells an investment that has gone up in value. In this case, the fund realizes a capital gain (which is calculated the same way as above), and this gain flows through to the investors holding the fund. As a result, you may receive a tax slip for these gains even though you did not sell any of your investment. This will increase your ACB, so, once again, you will not be taxed twice on these gains.

Your ACB can change if you:
Buy units of the same fund at different times. Your cost will then be averaged out which will affect your ACB.
Receive a distribution. It won’t matter if you receive this distribution or reinvest it, you will still be taxed in the year you receive it.
Receive return of capital. This occurs if your investment pays you a return of capital, this portion is not taxable to you because you’re taking your own money out, therefore when you sell your investment, any return of capital is subtracted from your ACB which will increase your capital gain.

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