What Is Adjusted Cost Base for Real Estate in Ontario?

When you sell a property that is not your principal residence, such as a rental or an investment property, the tax you may owe depends on your gain. The gain depends heavily on a number called the adjusted cost base, often shortened to ACB. A higher ACB means a smaller gain.

Many sellers wonder whether legal fees, land transfer tax and renovations count. The answer depends on what the cost was for and when it was incurred. This article explains the general rules in plain language so you can gather the right records before you sell.

What adjusted cost base means

Adjusted cost base is usually the cost of the property plus any expenses you paid to acquire it, such as commissions and legal fees. Capital improvements are added to it over time. Current expenses, such as maintenance and repairs, are not added.

The word adjusted matters. Your starting point is what you paid, and it moves up when you make qualifying additions. Think of it as the tax record of what you have put into the property.

What generally adds to it and what does not

The line between a repair and an improvement is not always obvious. A repair that simply restores a property to its original condition is generally a current expense. A capital expense generally gives a lasting benefit or advantage. A new roof on a building that already had one, or a new addition, can raise questions, so keep invoices and describe the work clearly.

Selling costs are counted separately

Costs of selling are not part of your ACB. They are called outlays and expenses of the sale, and include fixing-up costs, finders', brokers' and surveyors' fees, legal fees, transfer taxes, commissions and advertising. They reduce the gain but cannot be deducted from other income.

In practice, you will have two groups of costs: those from when you bought and improved the property, which form the ACB, and those from when you sold, which are the selling outlays. Keeping them in separate lists makes the calculation easier.

How ACB fits into the gain calculation

A capital gain is the proceeds of disposition minus the sum of the adjusted cost base and the outlays and expenses of the sale. Proceeds of disposition are usually the amount you received or are to receive.

Generally one-half of a capital gain is the taxable portion. Because every dollar you can properly add to ACB reduces the gain, it is worth getting the figure right, but you should not add costs that do not qualify.

• Gain = proceeds minus (ACB plus selling outlays).
• Taxable capital gain is one-half of the gain.
• Land and building are reported separately on Schedule 3 for rental property.

Situations that complicate the figure

Changing how you use a property can reset the picture. Every change in use is treated as a sale at fair market value, so converting a principal residence to a rental, or the reverse, triggers a deemed disposition and reacquisition at fair market value unless an election applies. That means your ACB going forward may be based on a value at the date of the change rather than your original cost.

If only part of the property changed use, the CRA usually treats that part as changed. The exception is where the rental or business use is relatively small, there are no structural changes, and no CCA is claimed, in which case the selling price and ACB are split between the personal and income-producing parts, for example by square metres or number of rooms.

Depreciation claimed on a rental building and the effect of a sale on that claim are handled through capital cost allowance rules. On a sale, a recapture of CCA is added to income. Whether that applies to you depends on your records, so ask your accountant or lawyer.

What to do next

• Find your purchase closing documents, including the statement of adjustments and the lawyer's account.
• List every capital improvement with invoices, and separate it from routine repairs.
• Note the date and any change in use, such as a move-out and rental.
• Gather your selling costs: commission, legal fees, advertising and fixing-up costs.
• Review prior-year rental returns and any CCA claimed.
• Speak with a lawyer or accountant before you file if the property was a former home, partly rented, or held for a short time.

Frequently asked questions