Cost Basis and Adjusted Cost Base: Why the Same Asset Has Two Different Costs When You Cross the Border

Every capital asset a cross-border taxpayer owns has two costs: a US cost basis in US dollars and a Canadian adjusted cost base in Canadian dollars. They start from the same purchase but diverge immediately because of the exchange rate, and they diverge further at each of the events the two countries treat differently: moving in, moving out, death, and reinvested distributions. Getting either one wrong produces the wrong gain on one return and the wrong foreign tax credit on the other.

Key takeaways

• US cost basis: the purchase price in US dollars plus commissions, adjusted for return of capital, stock splits, wash sale disallowances, and depreciation. Specific identification of lots is permitted. Inherited assets step up to fair market value at death.
• Canadian adjusted cost base: the purchase price in Canadian dollars (at the exchange rate on the purchase date) plus commissions, adjusted for return of capital, superficial loss disallowances, and reinvested distributions. Identical properties are pooled and averaged; specific identification is not permitted. Assets are deemed sold at death and the estate takes fair market value as its cost.
• Arrival in Canada: the ACB of most property resets to fair market value on the date of arrival (section 128.1(1)). US basis is unchanged.
• Departure from Canada: the asset is deemed sold at fair market value; the Article XIII(7) election lets the emigrant reset US basis to the same value. Without the election, US basis stays at historical cost.
• Currency: the same US-dollar gain can be a larger or smaller Canadian-dollar gain, or even a loss, depending on the exchange rate movement between purchase and sale.

The currency layer

A Canadian resident buys 1,000 shares of a US stock at $50 USD when the exchange rate is 1.30, and sells at $70 USD when the rate is 1.36. US-dollar gain: $20,000. Canadian ACB: $65,000 CAD. Canadian proceeds: $95,200 CAD. Canadian gain: $30,200 CAD, roughly $22,200 USD equivalent, higher than the US gain because the Canadian dollar weakened. Had the rate moved the other way, the Canadian gain would have been smaller than the US gain, and a small US gain could have been a Canadian loss.

The CRA accepts the Bank of Canada rate on the transaction date for capital transactions. The IRS expects the spot rate on the transaction date.

Pooling versus specific identification

Canada averages the cost of identical properties: 100 shares bought at $10 and 100 at $20 have an ACB of $15 each, and selling 100 produces a $15 cost regardless of which lot was sold. The US permits specific identification (selling the $20 lot to minimize gain) if the taxpayer identifies the lot at the time of sale; otherwise first-in-first-out applies. A cross-border taxpayer who uses specific identification on the US return has a different cost on the Canadian return for the same sale.

Reinvested distributions

Mutual fund and ETF distributions that are reinvested increase the ACB in Canada and the basis in the US. Return of capital distributions reduce both. Canadian funds report these on T3 slips; US funds on Form 1099. Phantom distributions (reinvested capital gains distributions from Canadian ETFs that are not paid in cash) increase ACB and are easy to miss.

Arrival in Canada

Under section 128.1(1), a person who becomes a Canadian resident is deemed to have acquired most property at fair market value on the arrival date. The ACB resets; only post-arrival growth is taxed in Canada. The US does not reset basis on a US person's move to Canada, so a US citizen arriving with a $100,000 gain carries a US basis that will produce a US gain Canada will never tax, and a Canadian ACB that will produce a Canadian gain only on growth after arrival. The foreign tax credit reconciles them imperfectly.

Excluded from the reset: taxable Canadian property (Canadian real estate) and property the person owned when previously resident in Canada.

Departure from Canada

The deemed disposition on departure fixes a Canadian gain at the departure-date fair market value, and the emigrant's ACB becomes that value for any future Canadian tax (relevant mainly if they return). The US, by default, keeps the historical basis. The Article XIII(7) election on the first US return treats the property as sold and reacquired at fair market value on the departure date for US purposes, stepping up US basis so the gain Canada taxed is not taxed again by the US. The election covers each asset that was subject to the deemed disposition and should be made asset by asset with the departure-date values documented.

Death

Canada deems all capital property sold at fair market value on death, taxes the gain on the final return, and gives the estate fair market value as its cost. The US gives inherited property a stepped-up basis equal to fair market value at death with no income tax on the unrealized gain (the estate tax applies separately above the exemption). A US citizen dying in Canada faces Canada's income tax on the deemed gain and the US estate tax on the value; a Canadian dying with US assets faces Canada's income tax and the US estate tax on US-situs assets above the treaty-prorated exemption.

Worked example

A Vancouver resident moves to Seattle on June 30 holding 2,000 shares of a Canadian bank bought at $60 CAD in 2018 (ACB $120,000 CAD) and worth $95 CAD on the departure date, when the exchange rate is 1.37.

• Canada. Deemed disposition at $190,000 CAD; gain $70,000 CAD; taxable $35,000; departure tax about $19,000 at BC's top rate.
• US default. Basis is historical cost in US dollars: $60 CAD in 2018 at 1.30 is about $46 USD; basis about $92,000 USD. Selling in 2028 at $100 CAD (about $73 USD) produces a US gain of about $54,000 USD, most of it pre-departure growth Canada already taxed.
• US with XIII(7). Basis steps up to $95 CAD at 1.37, about $69 USD; basis about $139,000 USD. The 2028 sale produces a US gain of about $7,000 USD, post-departure growth only.
• Canada after departure. No further Canadian tax on the shares (not taxable Canadian property).

Official sources

"In most situations, the basis of an asset is its cost to you." — Internal Revenue Service, Topic No. 703, Basis of Assets, https://www.irs.gov/taxtopics/tc703

"Adjusted cost base (ACB) is usually the cost of a property plus any expenses to acquire it, such as commissions and legal fees." — Canada Revenue Agency, Taxable capital gains on property, investments, and belongings, https://www.canada.ca/en/revenue-agency/services/tax/individuals/life-events/doing-taxes-someone-died/prepare-returns/report-income/capital-gains.html

"When you leave Canada, you are considered to have sold certain types of property (even if you have not sold them) at their fair market value (FMV) and to have immediately reacquired them for the same amount. This is called a deemed disposition and you may have to report a capital gain (also known as departure tax)." — Canada Revenue Agency, Leaving Canada (emigrants), https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/leaving-canada-emigrants.html

Practitioner note

Every cross-border client needs two cost ledgers, and most arrive with one. We rebuild the Canadian ACB in Canadian dollars at transaction-date rates and the US basis in US dollars, and we make the Article XIII(7) election on the first US return for every asset the departure tax touched. The election is free; missing it costs the US tax on gains Canada already collected.

See also: Planning a move? See the Canada-to-Florida guide and browse every corridor by city, province, and state.

Next step

Fairlight prepares the dual-basis reconstruction, the Article XIII(7) election on the first US return, and the U.S. and Canadian returns reporting each disposition. See cross-border pricing or book a call.