Often preferred shares are issued with conditions allowing the issuer to redeem the shares after a certain date for a predetermined price (the issuer has the option to redeem the shares, but not the obligation). Preferred shares can also have a predetermined maturity date, whereby the issuer has the obligation to redeem the shares on a certain date. Similarly, a bond almost always has a maturity date (except in the case of a perpetual bond) and can sometimes be callable (giving the issuer the option but not the obligation to redeem the bond).
The sale of a bond or preferred share in a non-registered account will result in a capital gain or loss. In the case where bonds or preferred shares are redeemed or matured, the securities are turned over for a predetermined price. The redemption or maturity occurs without any action on the part of the investor. However, a redemption or maturity nevertheless results in the recording of a sale for tax purposes, and a capital gain or loss will occur. This is the case in spite of the fact that the investor has not taken any action to sell the security.
To properly calculate the capital gain or loss resulting from the redemption or maturity, the adjusted cost base (ACB) must to calculated. The resulting gain (or loss) is equal to the difference between the proceeds from the redemption or maturity and the ACB.
Let’s look at an example. Suppose you purchase 1,000 shares of CIBC Preferred Shares Series 27 (CM-PE.TO) for $23.10 per share with a $10 commission, settling on June 4, 2010. The shares are redeemed on January 31, 2015 for $25.00 per share. A final dividend of $0.35 per share is paid on January 28, 2015.
The initial ACB after the June 4, 2010 purchase is calculated as follows:
ACB = ((Share Price) x (Number of Shares Purchased)) + (Transaction Costs)
= ($23.10/share x 1,000 shares) + $10.00
= $23,110.00 (total)
= $23.11 (per share)
The capital gain from the redemption on January 31, 2015 is calculated as follows:
Capital Gain (or Loss) = ((Share Price) x (Number of Shares Purchased)) – (Transaction Costs) – ((ACB per Share) x (Number of Shares Sold))
= ($25.00/share x 1,000 shares) – $0.00 – ($23.11/share x 1,000 shares)
= $1,890.00
The resulting capital gain from the redemption is $1,890.00. The transaction costs for the redemption is zero, as is usually the case.
In many cases the funds received around the time of the redemption of bonds or preferred shares will include two components:
- The proceeds from the disposition
- Accrued interest
It’s important to keep these two components separate. The proceeds from the disposition are used to determine the capital gain or loss. Accrued interest, however, has no effect on ACB or capital gains. Any accrued interest or dividends paid out should be taxable in the form of interest income or dividends and will appear on your T5 slip. Accrued interest should not be included in the proceeds of the disposition when calculating the capital gain or loss. This is why the $0.35/share dividend from the example above is not included in the calculations.
AdjustedCostBase.ca can help you calculate ACB and capital gains in cases where bonds or preferred shares are redeemed or mature. The redemption or maturity should be entered as a “Sell” transaction. The following transactions correspond to the above example:
- Buy 1,000 shares for $23.10/share with a commission of $10.00 on June 4, 2010.
- Sell 1,000 shares for $25.00/share with a commission of $0.00 on January 31, 2015.
Here is the result after inputting these transactions into AdjustedCostBase.ca:
