Return of Capital and How it Affects Adjusted Cost Base

AdjustedCostBase.ca 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.

Return of capital is a distribution from an investment that is not considered income.  It’s common for a fund or trust to pay out a distribution in excess of its income earned.  In this case the excess is considered to be return of capital.

The return of capital portion of a distribution is not considered taxable income for the current tax year.  However, the adjusted cost base of the security must be reduced by the amount of the return of capital.  As a result, the capital gain is greater when the investment is eventually sold.  Avoiding or forgetting to factor in return of capital distributions when calculating ACB will result in an capital gain value that’s too low and therefore would be considered tax evasion.

It’s worth noting that return of capital is usually the most tax efficient type of distribution.  In most provinces and most income tax brackets in Canada, the marginal tax on capital gains is comparable to that of eligible dividends.  However, the capital gain (and thus the tax on the capital gain) does not occur until the investment is sold.  Therefore tax is deferred on return of capital distributions.

Return of capital can occur for a variety of reasons.  For example, a mutual fund may decide to distribute more than it has earned, in order to maintain a constant distribution even when income falls.  In the case of a Real Estate Investment Trust (REIT), income for tax purposes is often less than net cash flow due to capital cost allowance for depreciation on its properties.  As a result, if the REIT distributes its entire net cash flow to unit holders, the distribution will exceed net income and a portion of it will be considered return of capital.

For Canadians holding foreign investments, any income that’s considered to be return of capital by the foreign country will be immediately taxable as income.  In other words, a return of capital distribution from a foreign fund does not provide the benefit of deferred taxes, and is taxed as income as opposed to a capital gain (and has no effect on ACB).

Return of capital is reported on box 42 on a T3 slip.  However, a T3 slip you receive from your brokerage may aggregate the amount for multiple securities, and ACB must be calculated separately for each security.  See Tax Breakdown Service for ETF’s and Trusts from CDSInnovations.ca for further details on this matter.

As an example, let’s assume you purchase 1,000 units of REF-UN.TO at a price of $45.00 per unit with a commission of $10.00.  The initial ACB becomes:

  (1,000 units x $45.00/unit) + $10.00
= $45,010.00

Then assume you receive a $1.00 per unit distribution that’s composed of 60% income ($0.60 per unit) and 40% return of capital ($0.40 per unit).  The ACB must be reduced to the following:

  $45,010.00 — (1,000 x $0.40/unit)
= $45,010.00 — $400.00
= $44,610.00

As a result, the capital gain when the units are sold will be $400.00 greater than it would have been if the return of capital distribution did not occur.

Note that return of capital cannot reduce ACB below zero.

AdjustedCostBase.ca supports calculations for return of capital distributions.  For the example above, the following “Return of Capital” transaction would be used:

REF-UN.TO Return of Capital Transaction

The ACB would be calculated as follows:

Transactions for REF-UN.TO

The tool will not allow return of capital to be reduced below zero.  If the return of capital amount should exceed the ACB, the ACB will be reduced to zero and the difference will be displayed as an immediate capital gain.

64 thoughts on “Return of Capital and How it Affects Adjusted Cost Base

  1. Lucy

    When you subtract the amount of return of capital from your ACB must you then subtract the units owned from your total using the price at time of distribution? I think not but please confirm.

    Question:Does the return of capital method mirror the distribution additions but in reverse?

    Thank you for your website and information. I understand adjusted cost base much better but still dislike return of capital. The fund is returning my invested money back to me increasing my ACB. If I fully reinvest the return of capital to buy more units should it not be revenue neutral therefore not subtracting the ROC.

    The fund returns my money ROC which is subtracted from my account. My capital is returned to me. I never get to see it in cash or reinvested. It disappears into thin air or is kept by the fund.

    I give you $100.00. You return the money by handing me a piece of paper saying you returned the $100.00 to me. I now have $100.00 less in my account.

    Sounds like smoke and mirrors accounting to me.

  2. AdjustedCostBase.ca

    Lucy,

    ROC involves a cash distribution only and the number of units you own does not change. What do you mean by “distribution additions”?

    In some cases, ROC can be a bad sign – for example a fund distributing more cash than it’s taking in to maintain the illusion of a high dividend yield.

    But it other cases ROC can be viewed as a good thing. For example, REIT’s commonly have large non-cash expenses such as depreciation on real estate, and as a result cash flow can exceed net income for tax purposes. If the REIT distributes an amount that exceeds its net income, then the difference could be considered ROC. And if the depreciation for tax purposes is larger than the true depreciation of the property, then the distributions may be sustainable. This is beneficial for investors in terms of taxation since ROC will defer taxes into the future as opposed to dividends which are taxable immediately.

    If you’re reinvesting an ROC distribution this will be equivalent to not having been paid ROC, all else being equal.

  3. Lucy

    By ,” distribution additions”, I meant the interest, capital gains and dividends distributed to the fund. They are added to your ACB plus the units they buy are also added.

    In my previous post I wondered if the return of capital subtraction also required the subtraction of units they had bought. You kindly answered my question by saying no,” the number of units you own do not change”.

    You stated,”If you’re reinvesting an ROC distribution this will be equivalent to not having been paid ROC, all else being equal.”
    Question#1: To clarify, are you saying that ROC is not subtracted from the ACB if you are reinvesting the distributions?

    While researching ROC online I came across this from CRA – “Tax Treatment of Mutual Funds For Individuals” which is new information to me. Now I am really confused!

    “If you receive a T3 slip with an amount in box 42 – Amount
    resulting in cost base adjustment, the ACB of that mutual
    fund trust identified on the slip will change. If box 42
    contains a negative amount, add this amount to the ACB of
    the units of the trust. If box 42 contains a positive amount,
    subtract this amount from the ACB of the units of the trust.”

    Question #2. How can the ROC be negative and why is it added?
    One step forward and two steps back.
    (Under the mattress seems so much simpler)

    Thank you for taking time to respond to my questions.
    Your knowledge is much appreciated.

  4. AdjustedCostBase.ca

    I think it’s best to look at the return of capital and the reinvestment of the distribution as two separate events, since as you’ve mentioned the distribution can contain other components in addition to ROC.

    Let’s say that you receive a distribution for $1.00 that’s 25% ROC and 75% income, and the entire distribution is reinvested for additional units. The ROC of $0.25 will decrease total ACB by $0.25. Then the reinvestment of the distribution will increase total ACB by $1.00. So the net increase in ACB is $0.75 resulting from both the ROC and subsequent reinvestment.

    The ROC does not affect the number of units, but the reinvestment does increase the number of units. If the entire distribution is ROC and is entirely reinvested, the net affect on ACB will be zero. But if the distribution is not entirely ROC (and is still full reinvested) ACB will increase.

    I’m not sure under what circumstances ROC would be negative (I don’t think I’ve encountered this before) but it would make sense that it should be added to ACB since a positive value is subtracted from ACB.

  5. lastminutetaxdoer

    Quick question: I understand that ROC reduces the ACB of the held securities, but what happens when you dispose of ALL of your shares in the year and then receive a ROC at the end of the year (per your T3 slip)? I’m assuming that you still subtract the ROC from the ACB at the time of the sale(s), (or from what you report) so that it reflects on your capital gain/loss? Or is there another way to do this? Many Thanks!

  6. AdjustedCostBase.ca

    lastminutetaxdoer,

    ROC can occur in distributions that happen any time of the year. Most likely you received ROC distributions before you sold the shares and that’s why it’s listed on your T3 slip. You should include it when calculating ACB (before the shares are sold).

  7. lastminutetaxdoer

    Of course, that makes obvious sense! And I went through my T3 Summary of Trust Income and that made it easier to find and enter the ROCs, rather than go through all of my securities transactions. Luckily the calculations turned out to be the same as if I subtracted it at the end of the year but I will make sure to enter them as they are distributed throughout the year. Thanks:)

  8. Tony M

    In your article you said:
    “For Canadians holding foreign investments, any income that’s considered to be return of capital by the foreign country will be immediately taxable as income. In other words, a return of capital distribution from a foreign fund does not provide the benefit of deferred taxes, and is taxed as income as opposed to a capital gain (and has no effect on ACB).”

    Is this something new? I am looking at my $US account for 2011 and see a ROC distribution. The $amount of the ROC is not included in the total income on the companion T5 form, therefore was not taxed as income. If it is not to be used to reduce the $UC cost base, then is it really a tax-free distribution? Or have I missed something?

  9. Sol Jakubowicz

    I am getting a return of capital adjustment figure on year end statements and on the T3 box 42,but not receiving any actual money. This roc adj. is used to decrease my adjusted cost base and therefore increase my capital gains if I were to sell the shares. Since I’m not receiving any actual $ what purpose does this serve?

  10. AdjustedCostBase.ca

    Sol,

    It’s possible the return of capital was reinvested into the fund and not distributed. If this was the case then the return of capital would decrease the ACB, but the reinvestment would increase the ACB by the same amount, and they would effectively cancel each other out.

    Unfortunately, reinvested amounts are not reported on T-slips. To see if there was a reinvested distribution for your fund you can follow the instructions here:

    http://www.adjustedcostbase.ca/blog/tax-breakdown-service-for-etfs-and-trusts-from-cdsinnovations-ca/

    and look for any “Total Non Cash Distribution” amount.

  11. Mame Bate

    Hi, I’m new to mutual funds this year, but learning fast. One of the T3’s that I received this year had an amount in Box 42. I have not disposed of the funds in the T3, so can I just ignore the amount in Box 42 this tax year until the year that I sell the fund and then use it to get an adjusted cost base?

  12. potatoman

    @Mame Bate

    Probably OK for this year, but after several years its possible for the RoC you receive on your investment to exceed the amount you initially paid for your investment. If the cumulative return of capital exceeds the amount you actually paid to acquire fund units, then your ACB could go negative. Negative ACB in a trust unit results in a capital gain that must be reported in that year. You should be tracking return of capital you receive on a fund by fund basis when you hold your funds in taxable accounts.

  13. oradba.ca

    Hi,

    I own a company and have investments, one of which is an REIT stock. I am wondering how to account for ROC in my books of account, or even IF the ROC should be reflected in my books. (I enter the monthly dividends into my books.)

    I keep a separate spreadsheet of purchases/sales and monthly dividends, and it is easy to apply the ROC there to reflect the ACB. Should I also be making a (credit) journal entry to the book value (asset) account to reduce the book value in my books of account (to accurately reflect company assets)? And if so, what is the contra account I should debit? It isn’t income for the current tax year. I didn’t receive any cash in hand. It isn’t dividends. How do I account for it?

    Thanks!

  14. AdjustedCostBase.ca

    oradba.ca,

    Normally for ROC, you can account for it in your books by crediting/decreasing the REIT and debiting/increasing cash. That seems unusual that you didn’t receive the distribution in cash, so you may want to double check that (unless the distribution was reinvested, in which case you would debit/increase the REIT, effectively negating the ROC).

  15. oradba.ca

    Thank you, I think have it now. The confusion comes by my monthly investment statement wherein the total distribution is listed simply as dividends. It isn’t until I get the T3 details that I can see this single value broken down into ROC (box 42 – amount resulting in cost based adjustment), Capital Gains (box 21, but listed on my statement as “Capital Gain Div”), and Other Income (box 26).

    I have been accounting monthly in my books as 100% dividends, and then when the T3 details arrive I remove the money from dividends and adjust the cost base in my book value account. Since I only report annually, this works for me for the most part. My year end is July and I get the T3 details for the previous calendar year. I’ll have to see if I can get these details on demand.

    Your article and reading through the comments have been very helpful.

    Thanks!

  16. Vern

    I receive T3 slips with box 42 ROC details. I would like to post the information on Quicken Home & Business 2016 program. There is a transaction on Quicken named Return of Capital & Transfer but what do I enter for Transfer Account?

  17. Ian

    For a Canadian REIT, is the amount reported in box 21 of the T3 slip as a capital gain added to the adjusted cumulative cost base?

  18. AdjustedCostBase.ca

    Ian,

    Capital gains distributions do not affect ACB, unless they are reinvested (via a DRIP or a phantom distribution). Capital gains that appear on your T-slips are reportable and taxable for the current tax year.

  19. laa

    hello,

    Is tax info on T5008/RL-18 usually correct for income tax purposes?
    Do I still need to verify ACB as per box 42 for all years?
    I don’t have any records when I stopped receiving cash dividends and started reinvesting.
    Also, on the statement I received from the Trust, I can see that amount is reported in the box 42 of T3 was used for shares acquisition. Confused. It says in the post that ROC is not used to buy shares. Should I then increase ACB by that amount or decrease?
    Please advise and clarify.
    Thanks

  20. AdjustedCostBase.ca

    laa,

    A report on ACB and capital gains from a mutual fund directly is more likely to be correct than that from a brokerage. See the following for more information about this:

    https://www.adjustedcostbase.ca/blog/can-you-rely-on-your-brokerage-for-calculating-adjusted-cost-base-and-capital-gains/

    If a return of capital distribution is reinvested, then the two actions effectively cancel each other out, resulting in no change in ACB. However, if the distribution is not entirely composed of ROC and/or the distribution is not entirely reinvested, then there will likely be a net change in ACB.

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  22. lastminutetaxdoer

    How do you deal with the ROC reported on Box 113 of T5013 (Partnership Income)? I believe it is still used to reduce the ACB of the limited partnership. How do make an entry of this in the transactions? Btw, I’m using your premium service and I really love it so far! Thanks:)

  23. AdjustedCostBase.ca

    lastminutetaxdoer,

    I believe ROC reduces your ACB for a limited partnership in the same way as other types of units. This can be inputted into AdjustedCostBase.ca as a “Return of Capital” transaction as described above. Just make sure that the total return of capital amount is correct when adding the transaction.

    Thanks for your feedback!

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  25. MungoDM

    Hello,

    My broker on an annual basis reduces my ACB by the amount of ROC on my T3 slip saving me the headache of doing the calculations myself unless I sell before the adjustments are processed. For most of my securities the amount reduced matched Box 42 on my T3 with the exception of Chartwell REIT. This REIT had a non-reportable component to the distribution that seems to have thrown the calculation out of whack. Does a non-reportable component affect the amount of the book value adjustment I should have on my ROC?

  26. AdjustedCostBase.ca

    MungoDM,

    According to Chartwell’s 2016 Management Discussion & Analysis:

    “In 2016, 36.7% of our distributions were classified as return of capital, 58.2% as non-taxable capital dividend and 5.1% as non-eligible dividend.”

    The non-taxable capital dividend portion does not affect ACB (and of course is not taxable). Only the return of capital portion affects ACB.

  27. A.S.

    Thank you greatly for sharing this valuable website and information. I have found it to be tremendously helpful to figure out how to calculate and track the adjusted cost base. For the Return of Capital ACB calculations, you have provided an example using the ROC percentages. Could you kindly offer an example on how you calculate the ROC when the CDS tax break down service reports ROC RATE instead of PERCENT values, using 2016 Horizons Active Emerging Markets Dividend ETF – Class E units (HAJ) for instance. I would like to know either how to calculate either the ROC ACB using the RATE value, or how to convert the RATE to PERCENT so I may apply it to your original example. Thanks again.

  28. AdjustedCostBase.ca

    AS,

    When the ROC amount is provided to you as a dollar amount, no further calculation is necessary. Adding a new “Return of Capital” transaction in AdjustedCostBase.ca you can input this dollar amount as a per share value. For example, the ROC amount for HAJ distribution with a record date of January 29, 2016 distribution would be $0.00466 per share.

  29. JB15

    Hi there, I disposed of a REIT which I held for a few year last year. In the past two years in April I noticed ROC amounts in my online brokerage activity. Although it reported $0 I made a note of the amount of the ROC and reduce my ABC in my own record keeping. I am wondering what am I to do for tax purposes if I notice another ROC adjustment next month despite having sold my shares last year? Would I have to reduce my ACB again and report the gain/loss for the 2017 tax return ?

    Thanks

  30. AdjustedCostBase.ca Post author

    JB15,

    ROC for the REIT would only be applicable to you for distributions occurring before you sold it. It’s not clear to me about the time frame for which your brokerage is reporting this. For example, does the April item correspond to an aggregate of all ROC for the previous year? In any case, there are ways you can determine the ROC on your own, without relying on your brokerage’s reporting, which may be incorrect or delayed. Here are some possibilities:

    https://www.adjustedcostbase.ca/blog/streamlined-import-of-return-of-capital-and-phantom-distributions-and-for-exchange-traded-funds-etfs-publicly-traded-mutual-funds-and-trusts/
    https://www.adjustedcostbase.ca/blog/tax-breakdown-service-for-etfs-and-trusts-from-cdsinnovations-ca/
    – Check the REIT’s web site or contact them about ROC information.

  31. Michelle

    I am a tax preparer and find this all so confusing . .. none of my clients keep track of their ACB making the necessary adjustments of ROC. And there is no way I can track it for them without loosing my mind!

    Why can’t the fund companies with their fancy computer systems keep track of this for us and give us a “good” number to use at tax time???

  32. Ben

    Hi – I Am invested in a limited partnership and have an ROC – box 113 on on T5013. I see that it reduces my ACB, but how is this supposed to help my total tax payable in 2017? I can’t see anywhere ro apply this ACB in the Turbo Tax software, so am looking for sone assistance on this. Am I misunderstanding this? Isn’t there supposed to be a tax advantage to me on an ROC?

    Thanks very much in advance.

  33. AdjustedCostBase.ca Post author

    Ben,

    You will not need to report anything related to your ACB of these shares and the return of capital distributions until the shares are ultimately sold. This is in fact the tax advantage of return of capital compared to other forms of distributions such as dividends or interest income (although from an accounting perspective, return of capital is equivalent to getting some of your original money invested back). Return of capital will reduce your ACB, thus increasing your capital gain when the shares are sold, but the amount is not immediately taxable.

  34. Ben

    Thank you – just one thing further on that. If I am receiving an ROC on that, why would the partnership be reporting those ROC as dividends, but also showing them on the T5013 as interest from Canadian sources? Box 128. Again, I may be missing something here, but that seems to defeat the purpose of the investment as a limited partnership rather than an interest bearing investment.

  35. AdjustedCostBase.ca Post author

    Ben,

    A distribution can have different portions designated as different types of income. For example, it could be part return of capital and part interest. The different components should add up to the amount of cash distributed (unless there was also a non-cash portion of the distribution).

  36. Robert

    How can I find a list of TSX companies whose payments are substantially return of capital?

  37. Tony

    I’ve come to several dead-ends trying to find the answer to my question and this might not be the best place to ask, but here goes:

    If a U.S. share holder of a Canadian company receives a ROC, what are the tax implications? I believe they are not taxed by Canada, but can anyone offer any ideas of how this is reported to the U.S. IRS and what tax rates apply? Does my cost basis of the stock drop based on the payment?

    Thanks in advance

    Baffled

  38. AdjustedCostBase.ca Post author

    Tony,

    I’m sorry, but I’m unfamiliar with US tax rules.

    In the reverse situation – where a Canadian owns US shares and receives a distribution that is considered return of capital in the US – the distribution is normally considered to be foreign income.

  39. Stuart

    As if I haven’t pulled enough hair out doing this !!!!

    I have entered lots of entries representing every transaction reported on my monthly statements from CIBC’s Personal Portfolio Service accounts, merged them and entered them into your site.

    I made the assumption that Reinvested Distributions on these statements are to be entered on your site as a Reinvested Dividend (so the amounts would be shown on the T3 as dividends), but now realize that if they could be reinvested capital gains. I then read that a reinvested capital gain is considered a sell followed by a purchase. MORE Sell lines to go onto Sched 3!!! How do I determine if these are Reinvested Dividends or Gains?

    I stumbled on this looking for info on Return of Capital. I have 2 funds in the portfolios that report on the T3 statement a “Return of Capital”. BUT I can’t find anything in the monthly statements that suggest anything about “Return of Capital” itemized. Let alone a date of when it occurred to lower the ACB by the RoC.

    I’m just drowning here!

  40. AdjustedCostBase.ca Post author

    Stuart,

    I have never heard of a reinvested distribution corresponding to a deemed disposition. I’m not sure whether you are referring to dividend reinvestment plan (DRIP) or whether this is the result of a phantom/non-cash distribution. These are described here:

    https://www.adjustedcostbase.ca/blog/calculating-adjusted-cost-base-with-reinvested-distributions-dividend-reinvestment-plans-drips/

    https://www.adjustedcostbase.ca/blog/phantom-distributions-and-their-effect-on-adjusted-cost-base/

    In either case, there should be no deemed disposition. The reinvested amount will be taxable as investment income in the year of the distribution. Phantom distributions are often, but not always, coupled with capital gains.

    If you’ve already inputted phantom distributions as Reinvested Dividend transactions on AdjustedCostBase.ca, you can leave things as is. You may need to input additional transactions to account for any return of capital or capital gains distribution components associated with these distributions.

  41. Stuart

    There’s the rub … the info on the T3 gives a summary showing the breakdown across the funds for the year of the items reported on the T3 detailed boxes But return of capital is NOT shown in those boxes and the monthly statements don’t show where it came from! AND there’s nothing to indicate WHEN to date the transaction for the reported return of capital.

    The reinvested distributions don’t say what their source was … I added up the reinvested distributions and they are more than the reported dividends.

    I am coming to the conclusion that this is a nightmare that never seems to end!

    All the statements seem to add up properly without any phantoms.

  42. Stuart

    A little closer mebbe … IF I add, for a given fund in the portfolio

    Capital Gains
    Actual amount of eligible dividends
    Taxable amount of eligible dividends
    Foreign non business income less tax on same
    Return of Capital

    This adds up to the reported reinvestments

    BUT all I have are totals and no dates these amounts happened so can’t know in what order they need to be inserted and what to do with them!!!

  43. AdjustedCostBase.ca Post author

    Stuart,

    I would suggest contacting the fund company to see if they can provide the exact dates. If you haven’t sold any units at all during the tax year in question, it should rarely matter when you input the return of capital transactions (an exception being in the rare case where return of capital might reduce your ACB to zero). In this case you could input the return of capital as an aggregate amount at the end of the year. If, however, you’ve sold units during the year then the timing of the return of capital can impact your capital gains.

  44. Chris

    I was wondering what constitutes as a foreign investment for ETFs. I have some Canadian listed ETFs (XUU, XEF, etc.) that hold investments from foreign countries and received notice on the T3s that there is some return of capital for these funds. Am I to claim the ROC as capital gains from these funds in the year that they are distributed or because they are Canadian listed funds, adjust the ACB accordingly?

    Many thanks for your insights!

  45. AdjustedCostBase.ca Post author

    Chris,

    For Canadian-listed ETF’s such as those that distribute return of capital, your ACB should be reduced accordingly and the return of capital portion of the distribution will not be immediately taxable. It’s only distributions from foreign funds that cannot be considered as return of capital, even if they are considered the equivalent of such in the foreign country.

  46. Ben Carter

    Hi – I have a T5013 reporting an amount in box 128 for Interest Income. Box 113 is also reporting an amount slightly less than box 128. I realise that the ROC in box 113 is to reduce the ACB, but do I need to deduct 113 from 128 to realise/defer the tax benefit/cost in each year that I own the limited partnerships share? If not, I don’t see the near term benefit of owning a limited partnership holding.

    Thanks in advance,

    Ben

  47. JIM MULLINS

    How do I calculate the ROC to apply to my ACB when I have only sold a portion of the stock I own? I have owned the stock for a few years and the T-slip for 2017 also showed an ROC amount.

  48. AdjustedCostBase.ca Post author

    Jim,

    Your ACB should be adjusted based on each individual distribution that includes return of capital (on the record date). If you have bought or sold units during the year, you should not simply deduct the total return of capital if there were multiple distributions throughout the year.

  49. Ben Carter

    Hi – I posted this mid April, but didn’t see a reaponse. Any thoughts??

    Hi – I have a T5013 reporting an amount in box 128 for Interest Income. Box 113 is also reporting an amount slightly less than box 128. I realise that the ROC in box 113 is to reduce the ACB, but do I need to deduct 113 from 128 to realise/defer the tax benefit/cost in each year that I own the limited partnerships share? If not, I don’t see the near term benefit of owning a limited partnership holding.

    Thanks in advance,

    Ben

  50. AdjustedCostBase.ca Post author

    Ben,

    The potential tax advantage of return of capital is that it’s not taxable in the year of the distribution. It reduces your ACB, and as a result you will incur a higher capital gain when you eventually sell.

    Return of capital is not directly related to interest income. These are two different types of distributions. Return of capital should not be deducted from any other form of income.

  51. Debra

    My T3 totals for Return on Capital for Year 2018 include amounts paid in January 2019. Can I assume that I can exclude the January 2019 amounts when reporting/calculating my capital gain? (my Adjusted cost base has gone negative)

  52. AdjustedCostBase.ca Post author

    Debra,

    Often funds make distributions with a record date near the end of the year, and the cash is paid out at the beginning of the following year. For the purposes of determining the year applicable to a distribution, it is the record date that matters. So it’s possible that a cash received in 2019 can apply to the 2018 tax year.

  53. Ryan

    Hello,

    I have a question related to how this whole process works and trying to do the accounting for it. If an ACB is reduced the journal entry would look like. I know it is a return of capital when I look at the box 42 for the T3 slip.

    CR Investment
    DR ????

    What would the DR side be? Especially if the cash balance did not change after the ACB on the mutual fund/ trust was reduced. In my case, its the Chartwell fund.

  54. AdjustedCostBase.ca Post author

    Ryan,

    If return of capital is distributed, either you should receive the cash or it is reinvested. If it is reinvested, then this would be equivalent to a credit for the investment and a debit for cash, followed by a debit for the investment and a credit for cash (the two sets of transactions would cancel each other out). In some rare cases a phantom distribution may have a return of capital component, in which case the return of capital and reinvestment would again cancel each other out, and it can be the case that no additional units are received.

  55. Patrick

    I believe the ACB calculation method described in the comments for limited partnerships are incorrect. Their tax advantage is really the fact that no matter the characteristic of the original distribution, it can be used to reduce the ACB.

    The following site[1] pretty much says all income must be used for calculating the ACB. If I use BIP.UN[2][3] for 2018 as an example, the calculations take into account all income distributions no matter their type.

    [2] is an example of an ACB calculation for someone who received BIP.UN units as a special dividend from BAM.A.
    [3] describe the distributions for a single unit of BIP.UN in 2018

    We can clearly read in [2]:

    “A holder of units is required to reduce the adjusted cost base of their units by an amount equal to the cumulative distributions received plus/(minus) any cumulative income/(loss) and other amounts allocated on their T5013. Taxable income is allocated to unit holders based upon distributions. The computation of adjusted cost base must be done in Canadian dollars.”

    In the example[2], the ACB is reduced by a total of $2.44931 per share for 2018, this number matches the combined dollar amount for all distributions found in [3]. This is regardless of the distribution characteristic.

    Paradoxically, we can see in [2] that the ACB is increased by $0.89666, which also matches the total tax allocation in [3].

    For this site, although sub-optimal in terms of their description, I believe all income from an LP would be booked as an RoC while the net tax allocation would be booked as a “re-invested capital gains distribution” with zero shares received.

    I am still trying to figure out how beneficial is an LP in terms of savings versus a regular REIT. I believe where it becomes beneficial is that losses in the partnership are carried through to the unit holder. In this case, BIP.UN was profitable for 2018, but BPY.UN[4] was not. In such cases, the ACB for BPY.UN would go up, not down, and this is backed up by the example at [5].

    Open questions:
    – If distributions, other than “true” RoC, are taxed in the year they are received, how is this more tax efficient?
    – If ACB is reduced by all distributions, doesn’t that mean we’re taxed a second time on the same dollars when the units are actually disposed?
    – If the ACB of the units ever goes to zero, doesn’t this mean the same dollars are taxed twice? First in the distribution, second on the capital gain.

    [1] https://www.mnp.ca/en/posts/an-introduction-to-partnerships
    [2] https://bip.brookfield.com/~/media/Files/B/Brookfield-BIP-IR-V2/2018-tax/Calculation%20of%20Adjusted%20Cost%20Base%20Common.pdf
    [3] https://bip.brookfield.com/~/media/Files/B/Brookfield-BIP-IR-V2/2018-tax/2018%20Canadian%20Taxable%20Income%20Calculation%20Common.pdf
    [4] https://bpy.brookfield.com/~/media/Files/B/Brookfield-BPY-IR-V2/tax-information/BPY%202018%20Canadian%20Taxable%20Income%20Calculation%20Updated%20Language.pdf
    [5] https://bpy.brookfield.com/~/media/Files/B/Brookfield-BPY-IR-V2/tax-information/BPY%20Adjusted%20Cost%20Base%202018%20Final.pdf

  56. AdjustedCostBase.ca Post author

    Patrick,

    It seems that technically speaking, the full amount of distributions from a limited partnership should be deducted from ACB, while the income should be added to ACB. In the case of BIP.UN in 2018, $2.4493 per share was distributed, of which $0.8968 was net taxable income. The difference of $1.5525 is considered return of capital.

    We can calculate the ACB by deducting $2.4493 per share and then adding $0.8968 per share, resulting in a net decrease of $1.5525. In this case, this is equivalent to reducing the ACB by the amount of return of capital. Either approach should have the same end result.

    So while all distributions from a limited partnership will decrease ACB, the net effect is the ACB will decrease by the amount of return of capital. If the distribution amount is smaller than the net income, the ACB would increase. This would be equivalent to a net reinvested distribution.

    Note that a reduction in ACB in isolation is not a tax advantage but rather a disadvantage. A lower ACB will result in a high capital gain when the units are eventually sold.

    The potential tax advantages of a LP may depend on the investor’s circumstances as well as the characteristics of the LP. One potential advantage can be the ability to flow-through losses. Another is that if the units are held in a registered account, no taxes would be paid by either the investor or the LP (with the possible exception of foreign taxes withheld). In the case of a corporation held in a registered account, the investor would not pay taxes but the corporation would (and there would be no dividend tax credit available).

    With return of capital, there is not really any double-taxation. While your ACB will decrease, the value of the shares or units should fall by the same amount, all else being equal. The ROC distribution is not taxable at the time of the distribution, and in theory there is no net change in capital gains when the shares or units are eventually sold.

    Your ACB is not permitted to fall below zero. If an ROC distributions exceeds your ACB then the ACB will be reduced to zero and the excess will be taxable as a capital gain at the time of the distribution.

  57. Patrick

    Thanks for replying,

    It just seems strange that if I have, say Canadian based interest allocated to me in a T5013, that I would reduce my ACB on that too because I’m paying taxes on the income reported on that tax slip.

    Technically speaking, I am taxed in a non-registered account on that interest, so why is it reducing my ACB too?

    Also, same thing, if my shares hit 0 eventually, that means I would pay taxes on both the income found on the T5013 and on the capital gains on the shares in the same year.

    It seems in both cases increasing the ACB by the tax allocation is meant to counter this double taxation effect but I don’t get it.

    LPs are giving me a headache.

  58. AdjustedCostBase.ca Post author

    Patrick,

    I think it’s best to think of the tax consequences of a limited partnership as 3 distinct parts:

    1) Net income is earned and taxed in the investor’s hands
    2) The net income is reinvested, increasing ACB
    3) Cash is distributed as return of capital, decreasing ACB

    If the net income is equal to the distribution, then 2) and 3) will cancel each other out, with no net increase or decrease to ACB. You will simply be taxed on the net income earned and you’ll receive that as a cash distribution.

    When you incur capital gains due to your ACB falling below zero, the net capital gains incurred during your lifetime will be the same as if you were permitted to reduce your ACB below zero. The only difference is that capital gains that would have been incurred in the future will be shifted to the present.

  59. Mandy

    I have a slightly different situation:

    I am holding my investments inside a TFSA so I do not receive a T3 slip at the end of the year.

    When I receive my monthly statement in May each year (for past 3 years) I see a description called “ROC Cost Adjustment” and there will be 12 line items (for each month of the year). There is no amount of cash being returned to me however the securities Company decreases my original cost base (ACB).

    From what I’ve read above if there is no cash being distributed back to me, the funds maybe getting reinvested – but if this were the case, why is the securities company reducing my ACB?

    I contacted the CFO’s at each of the holdings (one of them is a REIT) and have received no response.
    How else can I find out what exactly this “ROC Cost Adjustment” is?

  60. AdjustedCostBase.ca Post author

    Mandy,

    It could be that the distribution was reinvested as a phantom distribution (in some uncommon cases phantom distributions can be classified in whole or in part as return of capital) or reinvested as a result of being enrolled in a dividend reinvestment program.

    Note that it is not necessary to track ACB for holdings in registered accounts.

  61. Mandy

    Thanks for that information. I am aware that tracking cost base for registered accounts is not necessary. I guess I’m just curious and trying to learn as much as possible:)

    I will do some more research into what a “phantom distribution is”. I know for a fact that I don’t have a dividend reinvestment program setup with any of the holdings in question.

    You run a great resource here – bravo!!

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