Those are all good questions, and ACB is always a puzzle for new investors. The first thing to think about is exactly what
is "cost basis?" It is what you have legitimately paid for your investments. You are keeping track of your own funds so that you don't pay tax on that portion when you withdraw investments at some future date. The only way your ACB rises by 5k/yr is if
you are putting an extra 5k/yr into VCN.
If there is
return of capital, that is the fund company giving your own principal back to you, so the ACB for your investment has to go down.
If there is a
phantom distribution, this is income that you received (on paper) that is automatically reinvested back into the fund. Therefore, it is tax-paid money that you have contributed to the investment, increasing your ACB. I note there is a phantom distribution reported for VCN in 2021.
For any other kind of income (dividends, interest, etc.), it does not change what you have invested, unless you turn around and buy more units of VCN.
1. When it comes time to sell and I need to pay tax on my capital gains, I assume this is when ACB comes into play. How exactly will the CRA know if I've been tracking everything correctly (possibly over a span of 20+ years)? Do they calculate their own ACB somehow? Is calculating the ACB solely for my benefit? Would I ever be required to send in documentation of my ACB calculation?
It is your responsibility to track your own ACB and report it on your tax return when you sell fund units. The CRA doesn't keep track themselves, but they can audit you to check that you are not cheating. They do have some red flags they look for to try to catch people who misreport.
2. I am often entering things like "Return of Capital" $0.01. Do I actually need to enter this amount? Is there a minimum amount I should be entering?
It is wise to keep track of all changes to your ACB, big and small. If you are doing it properly, the effort is not any different.
3. All I've entered in the past is when I buy shares, return of capital (from my T3 summary of investment income and expenses) and once, in 2018, a capital gains dividend. My understanding is that I don't enter anything related to dividends (until I eventually buy more shares with them). This year on my T3, I have new lines that aren't 0- Foreign Income, and Other Income (Interest Income). These are not transaction options in ACB.ca, so am I just supposed to ignore them?
That sounds correct, but I wouldn't only use the T3 info. They usually do not report phantom distributions.
4. I've made this account joint, 50/50 split with my spouse (we make around the same income now and foresee making the same income in retirement). Is there any downside to doing this? If I need to change it, I'd rather do it now when the account has a low balance.
While many people do use a mixed joint account, it is best to keep separate "his and hers" accounts, although both can be joint for estate planning purposes - just make sure each spouse is the primary account holder on different accounts and contributions are kept seperate. If you mix and match who contributes to a joint account, there is a chance that CRA will attribute taxes to the higher income spouse.
You may have already read this paper on ACB:
https://www.pwlcapital.com/resources/as-easy-as-acb-understanding-and-tracking-your-adjusted-cost-base-with-etfs/