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You can save tax by getting your adjusted cost base in order

It's that time of year again. Our local college runs all types of courses each spring. I've been asked once again to teach a financial course. I don't get paid for it, but the college is allowing me, as in the past, to attend any other course that, well, my wife finds it worthwhile for me to take.

Carolyn has already enrolled me in two courses: (1) Learning how to find things, starting with looking in the right place instead of turning the house upside down; and (2) Loss of identity: Losing the remote to your significant other. I can't wait.

I'd like to suggest another course: Saving tax by knowing your adjusted cost base. Okay, so it doesn't sound enthralling, but a lot of Canadians are losing out because they aren't calculating their adjusted cost base (ACB) correctly. The higher your ACB, the less tax you'll pay on the eventual sale of an asset. Before filing your 2005 tax return, make sure you've properly calculated your ACB on assets sold in 2005. Consider these common scenarios.

Reinvested distributions. If you own mutual funds outside your registered plans, chances are good that you've received distributions that were reinvested. The value of these reinvested distributions should be added to the ACB of your funds. So, if you sold any funds in 2005, be sure to go back and track your reinvested distributions on those funds so that you don't pay more tax than necessary.

Inherited assets. If you inherit assets from someone other than your spouse, your ACB will generally be equal to the fair market value of those assets on the day you obtained beneficial ownership. If you sold any of these assets in 2005, be sure you know your correct ACB to avoid paying more tax than you should. Assets received from a spouse generally transfer at ACB, so the recipient spouse typically inherits the same ACB as the transferor spouse.

Exempt capital gains balance. If you made an election back in 1994 to use up all or part of your then-available $100,000 capital gains exemption, you might have elected to shelter capital gains on "flow-through entities" such as mutual funds. If so, you were deemed to have disposed of those assets at fair market value, and the realized gain was recorded in an account called your "exempt capital gains balance" (ECGB), which could have been used to shelter gains on those assets in subsequent years. Any unused ECGB on Dec. 31, 2004, was added to the ACB of any interest you still held in those flow-through entities. If you sold any of these assets in 2005, don't forget to adjust your ACB upwards by the amount of the unused ECGB.

Income trusts. If you own income trusts and have received a return of capital on your investment, don't forget that the return of capital reduces your ACB in the investment. If you sold any of these income trusts in 2005, remember to calculate your ACB correctly.

Stock option shares. If you acquire shares under a stock option plan at work, your ACB of the shares will not be the amount you paid for the shares (your exercise price).

Rather, your ACB will equal the amount you paid, plus any taxable benefit that should have been reported on a T4 slip to you in the year you exercised the options. In short, your ACB should equal the fair market value of the shares on the day you exercised your options. Speak to a tax pro for more help.

Tim Cestnick is a principal with WaterStreet Group Inc. and author of Winning the Tax Game, among other titles.

tcestnick@waterstreet.ca



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