Cost Basis vs Adjusted Cost Base: Cross-Border Canada-US

Every asset has a cost for tax purposes, and the two countries calculate it differently. The US calls it “cost basis” (or simply “basis”). Canada calls it “adjusted cost base” (ACB). When you buy a share of stock for $100, both countries start at $100. From there, the adjustments diverge: the US adjusts basis for things like wash sales, return of capital distributions, and depreciation, while Canada adjusts ACB for superficial losses, return of capital, and outlays to acquire or improve the property. The biggest divergence happens at death (US steps up to fair market value; Canada triggers a deemed disposition) and at a cross-border move (Canada triggers departure tax, creating a new ACB; the US does not recognize the deemed sale, keeping the original basis).

How does cost basis work in the US?

Under IRC 1012, the basis of property is generally its cost. Adjustments to basis include:

• Additions to basis. Capital improvements (for real property), reinvested dividends (if taxed when received), and certain transaction costs (commissions, transfer taxes).
• Reductions to basis. Return of capital distributions, depreciation and amortization (for business or rental property), and casualty loss deductions.
• Wash sale adjustments. If a loss is disallowed under the wash sale rule (repurchase within 30 days), the disallowed loss is added to the basis of the replacement shares.
• Step-up at death. Under IRC 1014, when a person dies, the basis of their assets steps up (or down) to fair market value on the date of death. The heirs inherit the assets with the new FMV basis, and the pre-death gain is never taxed.
• Gifted property. Under IRC 1015, the recipient of a gift generally takes the donor’s basis (carryover basis), with an adjustment for gift tax paid.

For publicly traded securities, the basis is typically the purchase price plus commissions. Most US brokerages track and report basis on Form 1099-B.

How does adjusted cost base work in Canada?

Under ITA 54, the adjusted cost base (ACB) of property is the cost of acquiring the property, adjusted for various items:

• Additions to ACB. Purchase commissions, capital improvements, and legal fees on acquisition.
• Reductions to ACB. Return of capital distributions (which reduce ACB dollar for dollar, potentially to zero), capital cost allowance (depreciation for rental or business property), and outlays or expenses deducted from the property.
• Superficial loss adjustments. If a loss is denied under the superficial loss rule (repurchase within 30 days before or after the sale), the denied loss is added to the ACB of the replacement shares.
• Deemed disposition at death. Under ITA 70(5), a person is deemed to have disposed of all capital property at FMV immediately before death. The estate (or the beneficiary) acquires the property at the same FMV, effectively resetting the ACB. The pre-death gain is taxed on the final return. This is the opposite of the US step-up, which eliminates the gain.
• Identical property rule. For shares of the same class of the same corporation, Canada uses the average cost method: the ACB is the weighted average of all purchases. The US allows specific identification (FIFO, LIFO, or lot selection).

What happens to basis when I move from Canada to the US?

When a Canadian moves to the US, Canada’s departure tax deems a disposition of most assets at FMV. The ACB for any future Canadian tax purposes resets to the departure-date FMV. The US does not recognize the deemed disposition. The US basis remains at the original cost.

Example:

• You bought shares for $100 CAD in 2018.
• You move to the US on June 1, 2025. The shares are worth $200 CAD on that date.
• Canada taxes the $100 gain on your final Canadian return (departure tax).
• Your Canadian ACB resets to $200.
• Your US cost basis remains at $100 (converted to USD at the exchange rate on the original purchase date).
• You sell the shares in 2027 for $300 CAD.
• Canada sees a $100 gain ($300 minus $200 ACB). If you are a non-resident, this gain is generally not taxable (shares of a public corporation are not taxable Canadian property unless they derive value from Canadian real property).
• The US sees a $200 gain ($300 minus $100 basis, in USD equivalent).

The FTC on the US return for the departure tax paid to Canada offsets some of the US tax, but the gain amounts are different, and the FTC is limited by the income category and the US tax rate.

What happens when I move from the US to Canada?

When a US person moves to Canada, there is no US departure tax (the US taxes citizens on worldwide income regardless of residence). Canada does not recognize a deemed acquisition at FMV on arrival (there is no “step-up on entry” in Canada).

• However, the CRA does allow a “bump” in ACB under ITA 128.1(1)(c) for certain properties when a person becomes a Canadian resident. The ACB is set to the FMV on the date of immigration. This prevents Canada from taxing gains that accrued before the person became a Canadian resident.
• For a US citizen, this creates a favorable position: the Canadian ACB is bumped to FMV on arrival, and the US basis remains at the original cost. If the asset is later sold at a gain, the Canadian gain (from arrival FMV to sale price) is smaller than the US gain (from original cost to sale price), and the Canadian tax is lower. The FTC on the US return credits the Canadian tax, and the US collects the difference.

What about the step-up at death vs deemed disposition?

This is one of the largest structural differences between the two systems. At death:

• US. Assets receive a step-up in basis to FMV (IRC 1014). The pre-death gain disappears. The heirs sell at the new FMV basis.
• Canada. Assets are deemed sold at FMV (ITA 70(5)). The pre-death gain is taxed on the final return. The heirs acquire at FMV.

For a cross-border estate (a US citizen who dies as a Canadian resident, or vice versa), both rules apply simultaneously. The deemed disposition at death guide covers the coordination in detail, including the estate tax credit under the treaty.

What should I do next?

If you have moved (or are planning to move) between Canada and the US, document the cost basis and ACB of every asset at the time of the move. For a move from Canada to the US, the departure tax return establishes the Canadian ACB reset (keep the T1 and T1161). For a move from the US to Canada, the FMV on the date of immigration establishes the Canadian ACB (get appraisals for non-publicly-traded assets). Track both the US basis and the Canadian ACB going forward, because a future sale will require both numbers.

• Departure tax on moving from Canada to the US, the deemed disposition mechanics
• Deemed disposition at death: Canada vs US step-up, the death-year coordination
• Wash sale vs superficial loss, the loss denial rules that adjust basis/ACB
• Capital gains tax: Canada vs US compared, the rate differences
• Form 1116 and the FTC, crediting the departure tax against US tax

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.