How do you calculate capital gains and capital losses?
To calculate your capital gain or capital loss, subtract the total of your property's adjusted cost base (ACB), and any outlays and expenses you incurred to sell it, from the proceeds of disposition.
How do you calculate your ACB?
Mutual fund units or shares are identical properties because each property in the group is the same as all the others. You may buy and sell several identical properties at different prices over a period of time. This occurs, for example, when you immediately reinvest your distributions in the mutual fund.
To calculate your capital gain from the units or shares you sell or redeem, you first have to calculate your ACB. To calculate the ACB of the units or shares sold or redeemed, multiply the average cost per unit of all units or shares held immediately before the sale or redemption by the number of units or shares redeemed (see Chart 1).
The average cost per unit or share of your total investment increases or decreases when you purchase new units or shares, or reinvest your distributions, depending on the price when the transaction occurred. Every time you buy additional units or shares, or reinvest your distributions, you should recalculate the average cost per unit or share. Do this for each of your mutual funds.
If you receive a T3 slip with an amount in box 42 – Amount resulting in cost base adjustment, the ACB of that mutual fund trust identified on the slip will change. If box 42 contains a negative amount, add this amount to the ACB of the units of the trust. If box 42 contains a positive amount, subtract this amount from the ACB of the units of the trust.
Example
Kate has mutual fund investments in XYZ Mutual Fund Trust and STU Mutual Fund Corporation. Over the years, she bought units in XYZ Mutual Fund Trust and reinvested her distributions from the trust to buy more units.
On June 30 of the year, Kate redeemed 200 units from XYZ Mutual Fund Trust at a price of $17.42 per unit, for a total of $3,484. Her redemption fees were $70. Kate records her redemption and her reinvested distributions, and she recalculates her adjusted cost base (ACB) for XYZ Mutual Fund Trust as shown in Chart 1.
For the year, Kate received the following information slips:
- a T3 slip from XYZ Mutual Fund Trust showing capital gains (reinvested distributions) of $750 in box 21 and a return of capital of $500 in box 42
- a T5 slip from STU Mutual Fund Corporation showing capital gains dividends of $330 in box 18 and a taxable amount of eligible dividends of $200 in box 25
Step 1 – Capital gains resulting from the redemption
The first step Kate takes is to calculate her ACB. Chart 1 shows how she does this.
The average cost of the units at the time of redemption is $15.20 per unit. She calculates the ACB for the redeemed units by multiplying the number of units redeemed by the average cost per unit (200 x $15.20 = $3,040). To calculate her proceeds of disposition, Kate multiplies the number of redeemed units by the redemption price (200 x $17.42 = $3,484).
Step 2 – Completing schedule 3
When she completes her income tax and benefit return for the year, Kate records her ACB ($3,040), proceeds of disposition ($3,484), and redemption fee of $70 on Schedule 3, under the heading "Publicly traded shares, mutual fund units, deferral of eligible small business corporation shares and other shares." To determine her capital gain (or loss) on this transaction, she subtracts the ACB and redemption fee from the proceeds of disposition [$3,484 - ($3,040 + $70)]. In this example, her gain is $374.
Kate also reports the capital gain of $750 from the T3 slip on line 17600 of Schedule 3 and the capital gains dividend of $330 from her T5 slip on line 17400 of Schedule 3. Kate does not report the amount of $500 from box 42 of the T3 slip on Schedule 3 or as income on her income tax and benefit return. This box 42 amount does result in an adjustment to her ACB as shown in Chart 1.
Kate's total capital gains on line 19700 are $1,454 (as $374 + $750 + $330). To calculate her total taxable capital gains, she multiplies this amount by 50%, for a result of $727. This is the amount she will enter on line 19900 of Schedule 3 and line 12700 of her return.
Consult this reproduction of the appropriate areas of Schedule 3 as Kate would have completed them. Kate records her redemption and any future buys or reinvested distributions, and she recalculates her ACB as shown in Chart 1.
If, instead of a capital gain, Kate had a capital loss of $1,454 on line 19700, 50% or $727, would be her net capital loss. Kate would file Schedule 3 with her return to register her loss. She can use this net capital loss to reduce taxable capital gains in any of the three previous years or in any future year.
Step 3 – Completing the Federal Worksheet
Kate completes "Line 22100 – Carrying charges, interest expenses, and other expenses" of the Federal Worksheet, and includes the $200 from box 25 of the T5 slip on line 8 under "Lines 12000 and 12010 – Taxable amount of dividends from taxable Canadian corporations."
If the ACB of the trust units is reduced below zero during the tax year, the negative amount is deemed to be a capital gain in the year. Enter the amount of the capital gain on line 13200 of your Schedule 3. Enter zero on line 13199 since there is no actual sale of units. The new ACB of the trust units is deemed to be zero.
Example
Evgeni purchased RST Mutual Fund Trust units for $1,000 in 2013 and received a $200 return of capital in each of the 2016 to 2020 tax years. Because of these returns of capital, totalling $1,000, the ACB of the units is zero by the end of 2020. This year, Evgeni received an additional $200 return of capital for the units. Since the ACB of these units is already zero, he must include this $200 in the calculation of his capital gains and losses for the year.
In the case of shares of a mutual fund corporation, amounts distributed on the shares as a return of capital will reduce the ACB of the shareholder’s shares in a way similar to that described above. Although any amounts distributed as a return of capital on such shares will not be reported on the T5 slip, you should keep track of such amounts so that you can correctly calculate the ACB of your shares.
How to calculate the proceeds of disposition?
The second step for determining your capital gain is to calculate the proceeds of disposition. Do this by multiplying the number of redeemed units or shares by the redemption price.
Report the capital gain (or loss) on lines 13199 and 13200 of Schedule 3.
You should also report capital gains from information slips on Schedule 3. Capital gains from a T3 slip are reported at line 17600 while capital gains from all other information slips (for example, a T5 slip) are reported at line 17400.
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