By: Adam Aptowitzer
In writing on the donation of capital assets such as publicly traded securities we often describe the adjusted cost base in static terms. Indeed, when discussing donations of assets where there is no tax on the disposition, such as publicly traded securities, certified cultural property or environmental property the cost base is rather irrelevant. But this simply serves to highlight the fact that the adjusted cost base (the “ACB”) of other assets is indeed very significant.
The ACB is more than just the purchase price of an asset and, counter intuitively, implies that the cost of an asset can change over time. For example, the purchase of a piece of real estate has an original cost but capital improvements to that property are then added to the cost base. At sale, the tax is calculated on the proceeds of the sale less the purchase price and less the costs of the capital improvements during the period of ownership. The original cost of the property plus additional capital expenses is called the adjusted cost base.
Typically, with respect to real estate, the records and the calculations of the cost base can be straightforward (although there are invariably decisions to be made as to whether an expense is on capital or income account). However, with financial assets, the calculation of the cost base can, in fact, be extraordinarily difficult. Consider the case of a dividend reinvestment plan where an individual buys a specific share and that share pays out dividends. These dividends are then automatically used to repurchase shares of that company. The amount of the purchase will vary with the size of the dividend and the value of the shares at the time of the purchase. In this case, the cost base of the total shares held in that corporation will change.
This concept can also be made more complicated. Within the context of an exchange traded fund there may be one or more assets which pay out a dividend. The fund may then allow for a dividend reinvestment plan such that the dividend given on one or two shares may be used to buy units of a fund that itself is comprised of twenty or thirty shares. The calculation of the cost base in these circumstances would be quite complicated (and best left to a finance professional).
When assets with a complicated cost base are sold, the calculation of the taxable capital gain may be in question. Indeed, the CRA may take one view towards the calculation of the cost base (thus affecting the taxes owing) and the taxpayer another. It may simply be an honest difference of opinion on the calculation of the ACB but the dispute itself could be a costly one to resolve.
When considering a donation, the donor may want to consider the donation of an asset with a complicated cost base and no taxes on the donation. For example, shares of a company with a dividend reinvestment plan rather than shares without. This would lessen the chance of a disagreement with the CRA in the case of a disposition, or deemed disposition, rather than donation. Clearly, one would have to have a sophisticated donor who is already considering such a donation. Nevertheless, the suggestion that donating assets where calculating the tax on the sale may be difficult would be the path of least resistance as far as the CRA is concerned.