The Enlightened Investor:Calculating the Cost Base of a Security Held in Multiple Taxable Accounts

investing loss

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.

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