Although rare, the situation can occur where you receive a ROC (return of capital) distribution that exceeds your adjusted cost base. Since ROC normally has the affect of reducing ACB, the question arises: should your ACB be reduced to a negative value in such a case?
The short answer is no, your ACB cannot go below zero, according to Canada Revenue Agency rules.
In such a case where ROC exceeds adjusted cost base, the ACB is reduced to $0. Furthermore, the amount by which the ROC exceeds the ACB is immediately taxable as a capital gain in the year of the distribution. Once the ACB has been reduced to $0, any further ROC distributions are entirely taxable as capital gains immediately.
The AdjustedCostBase.ca calculator takes this rule into consideration. The following example demonstrates this:
The transactions are as follows:
- The first transaction in April is a purchase of $1,000 of the security with a $10 commission, resulting in an initial ACB of $1,010.
- Next, in May, a $500 ROC distribution occurs, reducing the ACB to $510.
- Then in June, a $600 ROC distribution occurs. In this case, the ACB is reduced to $0 since $600 exceeds the ACB of $510. Furthermore, a capital gain of $90 ($600 less $510) is immediately applicable and must be reported for the 2014 tax year.
- Finally in July, a further ROC distribution occurs. Since the ACB has already been reduced to zero, the entire distribution of $100 is taxable as a capital gain in 2014.