Negative adjusted cost base (s. 40(3))

The rule applies to any property whose adjusted cost base the Act reduces under s.53(2), such as shares or a trust unit. Subsection 40(3) deems the excess a gain of the taxpayer for the year from a disposition at that time, even though there is no actual sale, and deems the property disposed of in the year for certain purposes, including section 110.6.

How the rule is built

• It compares the total of amounts required by s.53(2) to be deducted (except para. 53(2)(c)) with the cost plus the amounts s.53(1) requires to be added.
• The excess is deemed a gain of the taxpayer for the year from a disposition at that time, subject to para. 93(1)(b).
• Section 40(3.19) says s.40(3) does not apply where s.40(3.1) applies, which deals with limited partners and certain specified members of a partnership.

What to ask

The CRA gives one example: where the adjusted cost base of mutual fund trust units is reduced below zero in the year, the negative amount is deemed a capital gain and the units’ adjusted cost base is deemed to be zero. Ask the seller’s accountant for the running cost base of the shares or interest being sold, and what reduced it. See adjusted cost base and how capital gains are taxed on a sale.