# Stock splits and consolidations

Generally, a stock split takes place if a company's outstanding shares are divided into a larger number of shares, without changing the total market value of the company's holdings. The total market value of each investor's holdings, and their proportionate equity in the company, are also not affected.

For example, in the case of a 2-for-1 stock split, the number of shares is doubled and the price per share is decreased by 50%. If before the split, you owned 100 shares valued at \$60 each, you would now own 200 shares each worth \$30. If the stock split was 5-for-1, your previous 100 shares valued at \$60 would become 500 shares, each worth \$12. In each of these cases, the total market value is the same (\$6,000). This also applies when a consolidation (reverse split) takes place, and the number of shares decreases and the price increases proportionally. For example, 600 shares worth \$10 each that are consolidated 1-for-3 become 200 shares worth \$30 each.

In each of the above cases, no stock dividend is considered to have been issued, no disposition or acquisition is considered to have occurred, and the event is not taxable. However, the adjusted cost base (ACB) of the shares must be recalculated to reflect each split or consolidation, and when there is a disposition of the shares, the new ACB will be used to calculate the capital gain or loss.

This ACB is calculated by dividing the total cost of the shares purchased (usually including any expenses involved in acquiring them), by the total number of shares owned. For example, if you owned 100 shares of XYZ Ltd. that cost \$1,000 to purchase, the ACB of each share would be \$10 (\$1,000 ÷ 100). If the stocks subsequently split 2 for 1, you would now own 200 shares of XYZ Ltd. The ACB of each share must be recalculated and would now be \$5 (\$1,000 ÷ 200).