Adjusted Cost Base (ACB)

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The Adjusted Cost Base (ACB) of an asset represents its acquisition cost. When an asset is sold, taxes are normally due on the difference between the sale proceeds and the adjusted cost base. See Manage Asset Cost Base for information about automatically tracking ACB with EstateExec.

Definition

The Adjusted Cost Base (ACB) of an asset equals the amount it cost the owner to acquire the asset. Normally, this equates to the sum of the following:

  • The original purchase price of an asset
  • Associated purchase costs such as commissions or legal fees
  • Associated capital expenditures such as the cost of improvements to the asset (not including repairs or maintenance)

Deemed Disposition

When someone dies, their capital assets (i.e. most assets other than personal use items) are deemed by the Canada Revenue Agency to have been virtually sold immediately before death, so that any capital gains in asset value are recognized and any associated taxes are due on the decedent's final tax return (see Paying Taxes). These virtual capital gains are known as deemed proceeds.

For example, if the decedent had purchased a vacation home for $200,000, and added an additional bedroom for $20,000, the original ACB would be $220,000. If the home was worth $300,000 at the time of death, then the deemed proceeds would be $80,000.

If a capital asset is worth less than its ACB, then you will have a deemed loss, which can offset other tax obligations. However, personal use items (such as a car) or depreciable property cannot have a deemed loss.

After deemed disposition, the ACB of an asset becomes equal to the current market value of the asset. Heirs inherit assets at the adjusted cost base, so that if they later sell an asset, they will owe capital gains taxes only on the difference between their selling price and the full market value at the date of death.

Tax Exemptions: Deemed proceeds are generally not taxable for the following types of assets:

  • TFSAs (because they are "Tax Free" Savings Accounts)
  • The deceased person's principal residence
  • Assets left to a registered charity

Spousal Deferment: Assets left to a spouse, common-law partner, or spousal trust can usually be deemed to have been sold at their original ACB, so there is no immediate profit to tax, and taxation on any gains is deferred until the spouse ultimately disposes of the assets at some point in the future. Unless an extension is approved in advance, this treatment is only available if the spouse irrevocably receives a given asset within 36 months of the death See CRA: Deceased's Deemed Proceeds – Transfer to Spouse or Spousal Trust for additional information.

  • For example, if an asset is worth $1,000 with an original ACB of $400, its ACB at death would normally step up to its $1,000 value, and its deemed proceeds would be $600. However, if a spousal deferment were elected, then the ACB at death would remain $400, and the deemed proceeds would be $0.
  • In a situation in which a spousal deferment is elected for only 30% of the asset (perhaps the asset is being split between heirs), then the asset's ACB at death would become $820 (70% of the asset would be stepped-up, with 30% remaining at its original cost base, so $700 + $120) and the deemed proceeds would be $420.
  • If the asset is subject to a $300 bequest to another heir, and 30% of the residual asset benefits from a spousal deferment, then the asset's ACB at death would become $874 (the $300 bequest would be stepped-up, the 70% of the remaining $700 would be stepped up, and the 30% of the spousal distribution would remain at its original ACB). If the $300 bequest and the 30% were both subject to spousal deferment, the ACB at death would be $694.
  • This can get complicated!  Fortunately, EstateExec can automatically calculate ACB for you, including spousal deferments.

See also Income Tax Act 70(5) and CRA: Deemed Disposition.

Retirement Accounts

A retirement account (such as an RRSP or LIRA) enables the original owner to contribute pre-tax money during his or her lifetime, which then grows tax-deferred. When this money is withdrawn by the original owner, it is taxed as income. So for these types of assets, the Original ACB is considered to be $0.

When someone dies, the value of the retirement account is treated as income on the decedent's final income tax return, and the ACB at Death is then set to Value at Death.

However, if a retirement account has a spouse or common-law partner designated as the beneficiary, that person can choose to roll over the contents into their own registered account, deferring any tax implications, and keeping the ACB at Death as $0. If this is the case, you will need to notify the CRA so they can adjust the decedent's T4 slip appropriately.

See also CRA: Death of an RRSP Owner (Publication RC4177), and note that if the estate cannot pay income taxes associated with the retirement account, the CRA has the right to go after the beneficiaries of the account for any tax obligations.

Tax-Free Savings Account (TFSA)

A Tax-Free Savings Account allows the original owner to contribute post-tax money to an account in which the proceeds can then grow tax-free. Withdrawals by the original owner, even of generated income, are not normally taxed. Consequently, the adjusted cost base of a TFSA is irrelevant, but could be considered to be equal to the current value, since there are no reportable capital gains or losses. See CRA: TSFAs for more information.

When a TFSA owner dies, there are generally no tax implications for the decedent's final return.

If the will designates a successor holder, the successor inherits the TFSA and things continue as before, with income and withdrawals by the new owner considered to be tax-free. The adjusted cost base continues to be irrelevant.

If the will does not designate a successor holder, the beneficiaries named in the TFSA inherit the contents of the TFSA, generally with no tax implications (as long as withdrawals do not exceed the value on the date of death). The adjusted cost base of the inherited contents equals the value on the date of death.

See CRA: Death of a TFSA Holder for more information, and details on less common situations.

Annuities

An annuity is an investment that pays a guaranteed amount every year. Tax treatment of an annuity death payout can be a bit complex, and depends on how the annuity was originally purchased, who receives the benefits, the type of annuity, and how the benefits are paid out (i.e., monthly, or in a lump sum).

For example, if the annuity was purchased via

  • RRSP, LIRA, RRIF: Death benefit is taxable as income on the decedent's final return, unless the beneficiary is the spouse, in which case the amount is taxable for the spouse
  • RPP, LIF, LRIF, DPSP: Death benefit is taxable for the beneficiary
  • Non-registered premium: Tax obligations on death benefit vary depending on several additional factors

The annuity issuer should report to you any taxable income or capital gains reportable for decedent's final income tax return.

Trusts

A trust is a fiduciary arrangement that allows a third party, a trustee, to hold assets on behalf of beneficiaries. Assets contained within a trust are normally subject to deemed disposition upon the death of the person who created the trust (or upon the death of the last remaining spouse when dealing with a joint partner trust).

Cash

The adjusted cost base of cash is the cash itself. By definition, you can't have a gain or loss on cash.

"Cash" held in a deposit account is treated similarly to most assets: the cost base is the value at the time of death, and any subsequent interest earned is subject to potential taxation.

Note that foreign currency should not be considered "cash", and any realized gains or losses over $200 due to exchange rate fluctuations must generally be reported as income (see CRA: Foreign Currencies). If your estate includes sizable amounts of foreign currency you may want to seek the advice of a tax professional.

Personal-Use Property

Property that is purchased for personal use (such as a television, jewelry, or even a car) is not subject to deemed disposition, but you may still need to understand its ACB if you sell the property, and you may want to pass along your understanding of the property's ACB to heirs for use when and if they eventually sell the property.

Personal-use property is considered to have an Original ACB of the item's purchase price or $1K, whichever is greater (the reason for this rule is that the original purchase price may no longer be known).

However, you cannot recognize a capital loss on sale of personal-use property (because the value of such property is expected to decline over time). Thus, if the decedent had a personal-use car which he bought for $20K, and you sell it for $5K, you cannot recognize that "loss" to offset other gains.

The CRA defines a special subset of personal-use property known as Listed Personal Property, which includes jewelry, rare books, artwork, coins, and so forth. You can recognize a capital loss for these types of items.

For more examples and helpful information, see Canadian Business Journal: Disposition of Personal-Use Property, and see also CRA: Personal-Use Property Losses.

Assets Purchased by Estate

If an estate purchases an asset during the settlement process (perhaps as part of an interim investment strategy), the cost base of the purchased asset is simply the purchase price (in general).

Changes During Administration

The cost base of an asset can change during the period of estate administration as a result of transactions involving the asset. For example, income deposited into an asset (such as a stock dividend reinvestment) will increase the asset's cost base. Of course, the impact of any such changes are governed by the overall cost base treatment of the asset itself (for example, if the transaction occurs within an RRSP being rolled over to a spouse, no change to the RRSP's $0 cost base will occur).

Distributions

If you distribute an asset to an heir, it's nice to give the heir whatever information you have on the asset's cost base, but it is ultimately the heir's responsibility to handle this whenever he or she eventually sells the asset.

Non-Canadian Distributions: If you distribute an asset to someone that does not reside in Canada, the ACB will be assumed to be the then-current fair market value of the asset, and the estate will be responsible for taxes on the deemed disposition of any increase in asset value since death. See CRA: T3 Trust Guide - Distribution to non-resident beneficiary.

Fair Market Value Distribution Election: You have the option to treat distributions to residents the same as those for non-residents (i.e., at current fair market value) under subsection 107(2.001). To elect this option, you must attach a special letter to the estate's T3 return. See CRA: T3 Trust Guide - Proceeds of Disposition.

Special Circumstances

Finally, note that the information on this page is aimed at the general case. If you have special circumstances, that may impact the cost base of a given asset.

See also CRA: Adjusted Cost Basis for additional details concerning adjusted cost base, and Reference: Manage Asset Cost Base for information about automatically tracking ACB with EstateExec.

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