Written by Chris Turnbull on Dec. 15, 2015
Congratulations! You just sold and realized a profit on that promising investment (stock, mutual fund, ETF etc.). When you’re done planning how to spend your windfall you might also consider how much tax you owe on that gain. Unless the sale occurred within a non-taxable RSP or TSFA.
Normally, this is fairly straightforward. You subtract the amount you paid for the security from the proceeds (net of trading costs) to arrive at your taxable gain. A few questions come to mind though, such as, “Do I have any losses in the current year or three previous years to offset the gain and reduce the tax payable?”
Or, “Did I own this security in any other taxable investment account?” If you answered yes, it gets more complicated. Perhaps you own that security in your trading account at two different brokerage firms, in a joint account with your spouse or in a deferred profit sharing plan? To determine the true cost of the sold security you must average out the cost base of all purchases of that security regardless of which taxable account they are in.
Consider this example and let’s assume no trading costs for simplicity.
1. January 1, 2000 you buy 100 shares of Royal Bank stock at $50 per share in your taxable account at Brokerage ABC. You invested $5,000.
2. January 1, 2005 you buy 200 shares of Royal Bank stock at $75 per share in your taxable account at Brokerage XYZ. You invested $15,000.
3. January 1, 2015 you sell the 100 shares of Royal Bank stock at Brokerage ABC at $85 per share for net proceeds of $8,500.
What is your capital gain for which you must calculate your tax payable?
You might assume that you bought the 100 shares at Brokerage ABC for $5,000 and sold them for $8,500 so the gain is $3,500. Right? Well, not so fast. In fact, the cost base of the 100 shares sold is an average of all the shares that you own.
The correct calculation is:
$20,000 divided by 300 or $66.67 per share.
So, the adjusted cost base of the shares that you sold is in fact:
100 x $ $66.67 or $6,667
And your capital gain is:
$8,500 – $6,667 = $1,833
In this scenario, if you didn’t average out the cost base you would calculate a capital gain of $3,500 when in fact the gain is $1,883.
Any time you hold the same security in more than one taxable account you must average out your cost base to determine the true gain on any of sales of that security. You can avoid this issue by not spreading your holdings over multiple firms or across several taxable investment accounts.
If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.
Thanks to Chris Turnbull of The Index House for providing this article.
The Index House is a division of Polaris Financial Inc.
Chris's Contact Information
Other Posts by Chris
The Enlightened Investor - Fees & Expenses
Fees and expenses are the single biggest reason professional money managers fail to outperform the market return. Learn a little more about what are reasonable fees and what makes up most investment fees.
The Enlightened Investor-Understanding Returns
One thing frustrated investors often lament are their returns. So here's a question. Do you know what your returns really are? Find out more about how to measure your returns including some great but simple investment benchmarks over the last 5 years.
The Enlightened Investor – Risk (ETF’s)
Investors often remark that the world economy has changed and that it's more volatile than ever. They are less trusting of stock markets and they don't want to take risk.
I can't say I blame them. I might ask though, if the world has changed, if it is more volatile, "how are you changing the
The Enlightened Investor - A Game Plan
Do you make investment decisions according to what looks good at the moment? These purchases are often based on opinion and influenced by emotion. It can be exciting - much like buying lottery tickets.
Clearly, following a predetermined, diversified, well-thought-out, long-term investment strategy is preferable. Here’s why.
Dalbar’s study of investor behavior shows how investor
The Enlightened Investor-Retirement Income
Eventually investors move from the “saving-years” to the “drawing-years”, when they want to start drawing an income from their portfolios.
This can be confusing. For many the natural inclination is to liquidate their diversified portfolio in favor of income-producing stocks or bonds. However, the idea that retired individuals should load up on dividend-paying common shares
The Enlightened Investor: Is Your Portfolio Leaking Tax?
It may be obvious to state that an investor only keeps the after-tax return. It is less obvious how to minimize the tax leakage from your portfolio.
A good starting point is to identify the two primary causes of tax; portfolio turnover and an inefficient portfolio structure.
Taxes resulting from portfolio turnover can cost you
The Enlightened Investor: A Diversified Portfolio vs. a Collection of Investments - “Recovery Returns”
Do you want a portfolio that’s vulnerable to wild swings in value? Likely not. In fact less volatile portfolios are both easier on the stomach and they help you achieve better long-term returns.
For example, a portfolio that declines 10% this year requires an increase of 12% next year to recover its losses. If your
The Enlightened Investor: A Diversified Portfolio vs. a Collection of Investments “The Only Two Things You Need to Know About Modern Portfolio Theory”
Our best technique for protecting portfolios is called Modern Portfolio Theory.
This Nobel Prize winning idea said it is insufficient to look at investments in isolation as is done in the traditional approach of picking stocks and bonds. Rather rational investors will seek out “efficiently diversified portfolios” offering the highest expected return for each level
The Enlightened Investor-Deadline for the $500 Alberta Centennial Education Savings Grant (ACES)
If you have a child that is 10 years old or younger (born in Alberta between January 1, 2005 and March 31, 2015) they are eligible for a one-time $500 grant from the provincial government. However, you only have until July 31, 2015 to submit the form and apply for this grant before it ends
The Enlightened Investor: What is meant by “market return”?
The investment industry and media often refer to the “market” and the “market return”.
Or that the market was up or down on the day and that a portfolio manager's return outperformed or underperformed the market return. So what exactly do they mean and how does it relate to you?
The market generally refers to
The Enlightened Investor - Moving Small LIRA’s to Your RSP
When you have a job transition, you may transfer your pension plan savings to a locked-in-retirement account (LIRA).
LIRA’s are similar to Retirement Savings Plans (RSP’s) but with more restrictions. Adding another investment account will also add extra administration to managing your retirement savings.
Alberta pension legislation allows people age 50 or older to transfer
The Enlightened Investor: A New Trustee Act for Alberta
Provincial legislation is periodically updated. In Alberta, a revised Wills and Succession Act came into effect in 2012, an updated Estate Administration Act was passed in 2015 and now an initiative is underway to co-ordinate the Trustee legislation across Canada.
The Alberta Trustee Act is the provincial legislation governing the administration of trusts. A trust
The Enlightened Investor: Powers of Attorney for Property
A power of attorney for property is a written document by which a grantor appoints an attorney to act as a substitute decision maker with respect to the grantors property or financial affairs.
This grant of power becomes effective immediately upon the grantor signing the document unless otherwise indicated. While a General Power of Attorney
The Enlightened Investor: Registered Account Investment Fees Are Not Deductible
In November 2016, Canada Revenue Agency warned investors who are deducting investment fees charged for the management of their registered accounts that they are subject to a tax penalty perhaps as great as that fee. A registered account is a TFSA, RSP, RIF and the various locked in versions.
Investment fees charged to registered accounts