I'm starting to look into doing some tax loss selling. I know I am going to have some capital gains this year (I have some BCE shares and I fully expect the sale to the Ontario Teacher's Pension Plan to go through, maybe not at $42.75 but I am confident it will go through). I don't want to have to pay capital gains tax when that deal does go though. The only way to avoid that is to realize some capital losses. Fortunately (or unfortunately depending on which side of the coin you look at) I don't have to look too far to find some unrealized capital losses in my non-registered portfolio. I do still have a problem though. I don't really know what my Adjusted Cost Base (ACB) is on some of the shares that I own.

First a little primer on what exactly ACB is. The simple answer is if you take all the money you used to buy a stock and divided that number by the total number of shares that you own you get the per-share ACB for the stock. So if you bought 100 shares of XYZ company for $10/share and then 6 months later you bought 200 shares for $12.50 a share you have a total of 300 shares that cost you $3500 or $11.67 a share ($3500/300 = 11.67). You can also throw commissions in the cost but on the tax form commissions are in a separate column so it is probably easier to keep those separate. Now if you were to sell 100 of those shares for $15 each you would have a total capital gains of ($15-11.67)*100 = $333. On the other hand, if you sold 100 of those shares for $10 you would have a capital loss of (10 - 11.67)*100 = $167. The important thing to note is that generating capital gains or losses is done on an average of the per-share cost for acquiring the shares, not on a first bought, first sold or a last bought, last sold basis. In other words, even though you could think about the selling of 100 shares at $10 in the previous example as not generating a capital loss because the original purchase was at $10, it does generate a loss because of the ACB rules.

So what could be more simple than that? As tax calculations go there aren't too many calculations that get that straightforward. Except if you happen to own a trust that pays out a distribution that includes a return of capital portion. Some trusts can pass along some income in the form of what is called return of capital. This is a good way to receive income in a non-registered account because what return of capital does is lower your ACB. Why is this good? As long as you don't sell the units that are giving you a return of capital as part of their distribution you don't have to pay any tax on that portion of the distribution until you have received enough return of capital that your ACB is down to $0.

So if we continue to use the XYZ company from above and we say that XYZ company pays out a distribution that over the course of a year totals $0.50. The company or trust tells you as an investor that $0.20 of that $0.50 is return of capital (you should get this information on a T3 slip in March or April each year). Well what that means is that your ACB on those shares or units that you own has dropped from $11.67 a share to $11.47 a share. You wouldn't pay any tax on that return of capital portion until you sold the shares and realized a capital gain. If you happen to sell those shares at less than your ACB you would be able to claim a capital loss (to use to reduce other capital gains you may have, you can't use capital losses to reduce earned income).

So why don't I know what my ACB is on some shares that I own. Well, because I never bought the units I currently own. I have some units of Penn West Energy. Last year Penn West bought Canetic Resources and I owned units of Canetic Resources. Ok, so I should be able to figure out my ACB on the Canetic Resources units, right? You would think so but I never bought any units of Canetic Resources either. I bought units of Acclaim Energy trust and Starpoint Energy trust which merged to form Canetic Resources and a spin-off company called Tri Star Oil and Gas. To complicate things even further I did a swap with a US dividend paying stock that I had outside my RSP for some Acclaim shares I had inside my RSP. Doing the swap didn't have any tax impact in the year that I did it (to the best of my knowledge) but I don't know what to use as the ACB for those Acclaim shares. In addition to all that Acclaim, Starpoint, Canetic and Penn West have all been paying me distributions over the last 4 years that have some return of capital component to them.

In order to get this all figured out I am going to have to make a call to the Canada Revenue Agency. My biggest question is how to deal with the RSP swap that I did. I'll write a post about how I finally unraveled this confusing ACB calculation when I finally get it figured out, which I hope is sometime this week.