What is Book Value and Why Does it Matter?

Book value, also known as book cost or average cost, represents the average amount you have paid for your investments – which can change over time (see how below). When you sell your investments in a non-registered account, book value is used to determine your capital gain or capital loss for tax purposes. Here are some top questions investors ask about book value.

What is book value?

Book value refers to the original price you paid for a security plus transaction costs, adjusted for any reinvested dividends, corporate reorganizations and distributions, such as return of capital. In its simplest form (absent from adjustments), the book value calculation is pretty straightforward. For example, suppose you purchased 100 shares of company XY at $20 per share. Your book value would be $2,000 (100 x $20).

Is book value the same as market value?

Book value is not the same as market value. The market value of a security is based on its market price at a specific point in time, and is affected by fluctuations in the market. The book value of a security is not affected by the rise and fall of prices in the market. Let's say the price of XY that you purchased at $20 rises to $25. The market value of your security, XY, is now $2,500 (100 x $25), but the book value is still $2,000.

Can book value change?

Yes, it can change when you buy the same security over time at different prices, which leads to changes in the average price you paid for the investment. For example, if you bought 100 shares of XY at $20, and later purchased another 100 shares at $25, your book value would be $2,000 plus $2,500, or $4,500. Your book value per share, which represents the average cost you paid, would be $4,500 divided by 200, or $22.50 per share. Book value is also adjusted when you use dividends to purchase additional shares of the same company through a Dividend Reinvestment Plan (or DRIP¹), and when reinvesting mutual fund distributions and ETF distributions into additional units. Book value may also change if you receive return of capital distributions from a Canadian corporation, mutual fund or ETF, for example (more on this below).

How does book value affect taxes?

You need to know a security's book value in order to calculate the capital gain or capital loss when you sell it. In the example above, if you choose to sell your 200 shares of XY at $30 for a total of $6,000, your capital gain would be $1,500 ($6,000 minus $4,500 book value = $1,500). Note: This only applies to investments you hold in non-registered accounts. In registered accounts like RRSPs, RRIFs, TFSAs and RESPs, you pay no capital gains taxes on qualified investments.

Do return of capital distributions affect book value?

For certain investments, you may receive a non-taxable payment called a return of capital. This typically represents a portion of the money you originally paid for an investment (invested capital) that is distributed back to you in the form of a payment in cash or more units while you hold the investment. These payments are not taxed as income or capital gains, however they do reduce your book value. This may lead to a larger capital gain (or smaller capital loss) when the investment is sold. Note: If your investment is held in a non-registered (taxable) account, it is important to track your return of capital distributions and adjust your book cost, also known as Adjusted Cost Base (ACB) for tax-reporting purposes. This is to ensure you are correctly reporting capital gains and losses to the Canada Revenue Agency.

Book Value and Your RBC Direct Investing Account

How do I know what my average price is for a security I bought?

Head online to the My Portfolio Holdings page where you’ll find the Average Cost column next to Quantity when viewing an individual account. For grouped account views, your average cost can easily be determined by dividing the Book Cost column by the number of shares showing under Quantity.

Why do I need to provide book values of my securities?

For two reasons. In non-registered accounts, you will need to know the book value of a security to determine the capital gain or loss when you sell it. Also, knowing the book value will help you stay informed as you track your security over time. When you purchase a security in your RBC Direct Investing account, we update the market value and book value for you. Note: If you transfer in a security and you don't advise us of the book cost, the market value at the date of transfer (and not the cost of the investment) is used as the book cost and adjusted afterwards as described above.

How do I provide RBC Direct Investing with book values of my securities?

If you are making a transfer from a financial institution outside of RBC, you can download and fill out the Book Cost Form. You can find the Book Cost Form on the Forms & Agreements page under the My Portfolio menu. Then send it back to us, together with proof of the book cost (like a recent monthly/quarterly statement from the financial institution). If you are transferring securities from another RBC business like RBC Royal Bank or RBC Dominion Securities, you typically do not need to submit the Book Cost Form. If the book value of your transferred securities does not appear in your account(s), you will need to provide an account statement or other proof of the book cost.

How do I know if the book value I provide is correct?

RBC Direct Investing will not verify for tax purposes the book value you provide. You are responsible for ensuring the accuracy of the book value for tax purposes. Once the security is in your account, we will update the book value for you if more shares or units of the same security are purchased.

What happens if I don't provide book value to RBC Direct Investing?

We will use the market price of the security when it is transferred in to your account as the book value. You can find this under the “Average Cost" column on the My Portfolio Holdings page. When a security is bought and sold over time, the information may not be accurate for tax or performance measurement purposes due to discrepancies between the market and book values.

In this example, your sale of 100 shares on September 9 would generate a capital gain of $750 ($3,000 (100 x $30) minus $2,250 (100 x $22.50) = $750). The book value of your remaining 100 shares would still be $22.50 per share, which represents the average price you paid for the total number of shares.

Find the Book Cost Form on the Forms & Agreements page under the My Portfolio menu online.

Book value can change when you buy the same security over time at different prices, which leads to changes in the average price you paid for the investment. You need to know your book value in order to calculate the capital gain or capital loss when you sell a security in a non-registered account.

The information provided in this article is for general purposes only and does not constitute personal financial advice. Please consult with your own professional advisor to discuss your specific financial and tax needs.