Phantom Distributions and Their Effect on Adjusted Cost Base now offers a streamlined method for importing phantom distribution and return of capital transactions for many exchange traded funds (ETF’s), publicly traded mutual funds, income trusts and real estate investment trusts (REITs).  Learn more about this feature.

A phantom distribution (or reinvested capital gain distribution or notional distribution) occurs when an exchange-traded fund (ETF) or mutual fund makes a taxable distribution, but it’s reinvested back into the fund as opposed to being paid out in cash.

In the case of ETFs, an investor does not usually receive additional shares as a result of a reinvested distribution (hence the name, “phantom distribution”).  This is because ETF providers (a) do not maintain client records, and (b) cannot issue fractional shares.

Phantom distributions usually occur when an ETF or fund incurs a capital gain, and the capital gain is reinvested instead of being paid out in cash.  The capital gain will be immediately taxable and should appear on your T3 or T5 slip that you receive from your brokerage.  So the capital gain will be accounted for when you compile your tax slips.

However, investors need to take additional steps to ensure that their adjusted cost base (ACB) is correctly calculated when phantom distributions occur.  A phantom distributions, similar to a DRIP, results in an increase in ACB equal to the amount of the reinvested distribution.  It’s in your best interest to account for phantom distributions.  If you fail to do so, you’ll end up paying more capital gains tax than necessary when your shares or units are eventually sold.

The ACB resulting from a phantom distribution can be calculated as follows:

New ACB = (Previous ACB) + (Reinvested Distribution)

A phantom distribution is not usually specified on T3 or T5 tax slips, nor is it indicated on statements from your brokerage.  As a result, the onus is often on the investor to determine whether a phantom distribution has occurred.

How do you determine whether a phantom distribution has occurred?  One way is to consult the web site of your ETF or fund provider.  For example, iShares issued a press release listing the reinvested distribution amount per unit for each of its funds for 2013.  More than two dozen of iShares’ funds had a reinvested or phantom distribution in 2013, and some of the amounts were significant.

For example, we see from this press release that “iShares S&P/TSX Capped REIT Index Fund” (XRE) incurred a reinvested distribution of $0.62205 per unit in 2013, with a record date of December 31, 2013.  This amount is reinvested into the fund, but investors did not receive any additional units.

XRE.TO Phantom Distribution is a web application that can be used to assist investors in calculating ACB including when phantom distributions occur.  A phantom distribution can be specified by adding a “Reinvested Capital Gains Distribution” transaction.  For the case of XRE in 2013, this would be done as follows:

XRE Reinvested Capital Gains Distribution

Note that for this case you should enter “0” for the “Additional Shares Purchased/Received” because this is a phantom distribution where no additional shares are received.

In this case, the reinvested distribution has a corresponding capital gain associated with it.  When using the “Reinvested Capital Gains Distribution” transaction type, the capital gain will be displayed automatically:


If a reinvested distribution were to occur without a corresponding capital gain, then you could use a “Buy” transaction instead, again setting the “Shares” amount to zero.

Another way to check if a fund you own incurred a phantom distribution is to consult the web site.  Steps on how to find this information can be found here.  Here is a snapshop of the year’s final distribution that includes the $0.62205 per unit phantom distribution:

XRE Tax Breakdown from CDS Innovations

The “Total Non Cash Distribution ($) Per Unit” row indicates that a phantom distribution of $0.62205 per unit has occurred.  With this information, you can then add the “Reinvested Capital Gains Distribution” transaction on as shown above.

Note that there is a capital gain in this column equal to $0.65302 per unit.  Since this capital gain is greater than the phantom distribution, there’s a residual capital gains distribution equal to ($0.65302  — $0.62205 = $0.03097) per unit.  This would be entered into as a “Capital Gains Dividend” transaction as follows:

XRE Capital Gains Dividend Transaction

In some cases, the reinvested distribution, or a portion of it, is not in the form of a capital gain (for example, interest income).  In these cases, you can enter the distribution using as a “Buy” transaction (and setting the number of shares to zero if no additional shares are received).  A special case occurs when a reinvested distribution is in the form of return of capital.  The reinvested distribution and the return of capital effectively cancel each other out: the ACB gets decreased by the return of capital amount, and then increased by the reinvested distribution amount.  On, this can be entered as 2 separate transactions: a “Return of Capital” transaction and a “Buy” transactions.


27 thoughts on “Phantom Distributions and Their Effect on Adjusted Cost Base

  1. Tyler

    Very useful post. I’ve noticed in the past that not all reinvested (or “phantom”) distributions are capital gains. BMO in particular seems to like doing this with their ETFs. I’ve seen reinvested interest (ZRR) and even reinvested return of capital (!) with ZCN.


    Thanks, Tyler. I’ve added a note above to address these cases.

    When a reinvested distribution is in the form of return of capital, it’s a particularly interesting case. When investors are completely ignorant about the effects on ACB of both return of capital and reinvested distributions, two wrongs will make a right, since they cancel each other out.

    However, in the case where an investor notices the return of capital amount on their T3 slip and decreases ACB accordingly, but fails to increase ACB because the reinvested distribution isn’t listed on the T3, they’ll end up overpaying capital gains taxes when the shares are sold.

  3. neilsherri

    In discussion with CRA about interest paid to purchase mutual funds, the interest may or may not be eligible to claim as carrying costs, based on the premise that the mutual fund typically generates capital gains, not income. They said in that case, the borrowing cost could instead be included in the ACB.

    How would that be done in the adjustedcostbase interface? I’m thinking maybe a ‘buy’ transaction with an amount but zero shares?

  4. neilsherri

    I may have been mis-remembering an article I’d seen where one of the newer tax software applications did something like this, although perhaps not this exactly. Then when the CRA agent suggested it, that helped me convince myself it was real. I’ll see if I can find a better reference 🙂

  5. neilsherri

    After going back through everything, it seems it was only the CRA agent who said to do this.

    I think the article I’d seen was actually talking about adding superficial loss to the ACB, not adding carrying charges to the ACB.

  6. Grant

    A very helpful post. Thanks. Just to clarify, if on CDS Innovations, there is just a capital gain listed (with no non cash distribution), that amount should be recorded as a capital dividend?



    I’m going to assume you mean Capital Gains Dividend/Distribution as “Capital Dividend” has a another special meaning.

    Yes, this should be recorded as a capital gains dividend. Assuming that there is no non-cash distribution, the amount should appear on CDS Innovations as a cash distribution.

  8. Grant

    Thanks, yes, I meant Capital Gains Dividend. In the instance I was looking at CDS Innovations (Dec 31, 2013 ishares MSCI emerging market IMI ETF), there is a capital gain of 0.00017 with no none cash distribution. There is a cash distribution of 0.17717, which I had assumed was all dividend, but I guess includes the capital gains dividend?



    In that case, yes, you would record a capital gains dividend of $0.00017 per share. Note that there is also return of capital in the amount of $0.01665 per share. Aside from that, nothing else will affect ACB assuming the cash distribution is not reinvested.

  10. Grant

    Yes, I noticed that adding the Capital Gains Dividend did not change the ACB. So why bother adding it and why do you have that choice in the new transaction menu?



    You’re correct that a capital gains dividend should not affect ACB. This transaction type is there for completeness (so that all capital gains can be compiled in one place), but it’s not necessary to track it on as long as your T slips are accurate and you include them when completing your tax return.

  12. Grant

    Thanks, that’s very helpful. So, from the point of items that appear on the CDS Innovation spreadsheet that will change the ACB, one only needs to record return of capital and total non cash distributions (recorded as reinvested capital gains). Would that be correct?



    That’s almost correct. There are some cases where a non-cash distribution is not coupled with a capital gain (and some cases where it is only partially coupled). In those cases you would use a reinvested distribution transaction.

  14. sean

    OK am I understanding correctly? There are basically 5 scenarios when looking at the CDS sheets and phantom distributions:
    – a non-cash distribution with blank capital gain box
    – a non-cash distribution equal to capital gain box
    – a non-cash distribution with a greater amount capital gain box
    – a non-cash distribution with a lesser amount capital gain box
    – a non-cash distribution with an percentage (e.g. BMO ETFs) in the capital gain box



    I believe that a non-cash distribution could be allocated in any way among the various categories (capital gains, return of capital, etc.). It is typically coupled with a capital gain of a equal amount, but the capital gain could be less than the non-cash distribution amount with the difference being allocated to other categories. I don’t think that the capital gain could be greater than the non-cash distribution amount, unless there’s an additional cash distribution amount combined into the same entry (typically the non-cash distribution is a separate entry at the end of the year, distinct from a cash component). The entries can be completed either with a dollar amount or a percentage of the total distribution.

  16. Wayne

    I am considering signing up for the paid version of this website but I am unclear if automatically handles phantom distributions. Above their are instructions for using the CDSInnovations website for getting the data and entering a transaction into If I have entered all of my transactions into this website then why aren’t the phantom distributions calculated automatically? Can’t you just automatically download all of this info from CDS and apply it to my holdings, which you already know?



    The streamlined import feature for importing phantom distributions and return of capital transactions for ETF’s and other funds is described here:

    With this feature you do not need to go through the process described above for phantom distributions (in addition to return of capital and capital gains distributions). You’ll still need to initiate the import process for each ETF each year, but the process is much less tedious and error-prone compared to the manual alternative.

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  19. Heather

    Can all funds be found on the CDS website? I have searched multiple times for RBF448 and just can’t seem to find it. I’m trying to double check whether they made any phantom distributions.

    Also, on the RBC website they list for example, that 0.17 of the total 0.51 distributed was RoC. When I use that number to calculate RoC I get $1666.40 while the T3 says $1699.60 . Is there an obvious reason for this discrepancy?

  20. Post author


    Only data for publicly traded funds (ETF’s, REITs, and other exchange traded trusts) is available. Non-publicly traded mutual funds (such as the one you mentioned) are not available.

    A possible explanation of the discrepancy you’re seeing is that the number of shares owned throughout the year changed. If that’s the case then multiplying the total distribution by the number of shares owned at the end of the year will not be accurate.

  21. Henry

    Thanks very much for the guide – looks like many BlackRock ETFs just did this (phantom distributions, for example XUU ( for the 2021 year-end distribution (mix of both cash & reinvested phantom distributions).

    Just to confirm, is my understanding accurate (that the case above for XUU is the scenario being described by this post and that I should be accounting for these reinvested distributions into the ACB calculation)? Really appreciate it and happy new year!

  22. Post author


    Yes, the “Reinvested” amount listed for the Dec. 30, 2021 distribution for XUU is a phantom distribution and your ACB would increase by this amount. Note that the full tax breakdown for 2021 hasn’t been made available yet, so we can’t say whether this amount corresponds to a capital gain or some other type of distribution.

  23. Alex Cooper

    If the Phantom amount represents real money earned by the ETF from Capital Gains and the ETF decides to Reinvest instead of paying out to the unit holders or issuing new units then what confuses me is how the money is reinvested? Where does it go? I have the nagging feeling that the money is being taken away by the portfolio managers. Bigger bonus or something. New units are not created so where is this cash being invested? We all seem to accept the term invested in the ETF but what does this really mean? The ETF should represent the total number of units + cash. As no units are created where is the money going. I want to follow the money. Any insights?

  24. Post author


    Phantom distributions typically arise from when an ETF sells some of its holdings and doesn’t distribute the capital gains to unitholders. A common scenario is when an ETF rebalances its holdings or shifts around its holdings (for example, if the constituents of an index being tracked changes). If the holdings have risen in value then the unitholders will be taxed based on the resulting capital gain. It’s often not desirable for the ETF to distribute the gain in cash in these scenarios, especially if the holdings have risen by a large amount, since it could result in an unusually large distribution. Often in these scenarios the proceeds are used to purchase other holdings. It’s possible the proceeds could be used for other purposes, such as paying the fund’s expenses, funding redemptions or increasing the fund’s cash balance, however.

  25. Zaphod

    You are not getting ripped off with phantom distributions. Think about when Tesla was added to the S&P500. Tesla was a pretty big stock to be added to the index. Let’s say you are a $100B index fund and Tesla is being added with a 2% weight in the index. The PM has to buy $2B on Tesla, but to do so he has to sell the other 499 stocks, plus the stock that is being dropped. So he has to sell a bunch of Apple because it is the largest stock – Apple is about 7% of the index so he has to sell 7%x$2B or $140M of Apple. Apple has been up over the last several years so when he sells Apple the ETF has a capital gain. But the proceeds of the sale are not distributed to unit holders, they are used to buy Tesla shares. You aren’t getting screwed by that.

    This would be even worse with actively managed ETFs that have lots of transactions, not just additions, deletions and rebalancings.

  26. Hans de Nie

    I own the Harvest Clean Energy ETF Class A units (HCLN.TO) in both, a tax free account, and a taxable account.
    A ROC Notional Distribution was received and a T3 was issued which caused a 2021 tax liability in my open account.
    I did not receive the distributionin in cash and the number of shares remained the same for both accounts
    My question is how and when does this distribution benefits the owner for the two accounts???

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