Adjusted cost base — and why leverage adds a second layer

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Your adjusted cost base (ACB) is the cost of an investment for tax purposes: what you paid for it, adjusted over time for further purchases, reinvested distributions, return of capital, and other events. When you sell, your capital gain is the proceeds minus the ACB, so an accurate ACB is what keeps your capital-gains reporting correct.

ACB is a moving number

ACB is rarely the price on your first buy. It changes as you go:

• Buying more of the same security blends into a new average cost.
• Reinvested distributions add to your cost base.
• Return of capital lowers your ACB — and can push it below zero, which triggers a capital gain.
• Partial sales remove cost at the average, not at the price of any particular lot.

Miss any of these and your ACB drifts — usually in the direction that overstates or understates a future capital gain.

The extra layer when you borrow to invest

For a leveraged or Smith Manoeuvre portfolio, ACB alone isn't the whole story. You also need to know how much of that cost base was funded with borrowed money versus your own cash. That borrowed portion of your cost base is what links your holdings to your interest deduction, and it matters in two concrete situations:

• Repaying the right amount of credit. When you sell, the proceeds that trace back to borrowed money are the proceeds you'd use to pay down the investment loan while keeping the remaining interest deductible. Knowing the borrowed share of the position tells you how much to repay — and how much is simply your own capital coming back.
• Defending deductibility if the CRA asks. The deductible portion of your debt is only as solid as your ability to trace borrowed dollars to the investments they bought. Tracking the borrowed cost base alongside the ACB keeps that trace intact through every buy, sale, and distribution.

In other words: ACB answers “what's my capital gain?” The borrowed portion of cost base answers “how much of my interest stays deductible, and what should I repay?” Leveraged investors need both, and they move together.

Why this is hard to do by hand

Two averages have to stay in sync — the ordinary ACB and the borrowed slice of it — across every event, for every holding, over years. A return of capital that lowers ACB can also change what remains traceable to borrowed money. A partial sale removes both averages at once. This is exactly the kind of compounding bookkeeping that a spreadsheet quietly breaks on.

How the tracker helps

The Deductible Interest Tracker maintains your adjusted cost base and the borrowed portion of it from your actual events, so both stay correct as you buy, sell, and receive distributions. That feeds your capital-gains figures, tells you how much credit to repay on a sale, and keeps your deductible-interest record defensible.