Personal Finance

How do I pay tax on Return of Capital (ROC)?

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  • May 1st, 2012 3:14 pm
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Member
Apr 29, 2012
430 posts
435 upvotes

How do I pay tax on Return of Capital (ROC)?

I hoping some one out there can help me out. I’ve read articles, I’ve read the Tax Treatment of Mutual Funds for Investors manual and I am ready to shoot myself. Basically this return of capital and adjust cost base calculation is confusion the ‘heck’ out of me.
ROC is not taxed, but it is described as deferred capital gains (or lost). So in addition to ‘when’ is the tax is paid, it is also how is the tax calculated ?
Perhaps an example would help.

I had a mutual fund. Kept it for 3 years then decided to sell it. This fund paid monthly distributions, all of it reinvested. At the end of each year I get my T3 with a box 42, my ROC amount.

After only 3 years I have not received all of my capital back so my ACB is not zero. Well it shouldn’t be zero.
This is where I need help. In my simplified understanding of Tax Treatment of Mutual Funds and ROC, is the following correct?

ACB = (book value – (ROC of year 1 + ROC of year 2 + ROC of year3) )

Capital gains or lost = sale price of all units – (purchase price of all units ie. book value - (ROC of year 1 + ROC of year 2 + ROC of year3) )


If you sell all of your units, do you still need to calculate and maintain the ACB?

Thank you
5 replies
Deal Addict
Dec 31, 2006
1420 posts
297 upvotes
It reduces your cost basis. So when you sell the shares your acb is lower so your capital gain will be higher.
Jr. Member
Oct 24, 2006
112 posts
13 upvotes
You would not subtract the Return of Capital (ROC) from the Adjusted Cost Base(ACB) if the ROC was reinvested and not received as cash. Mathematically, the amount of ROC would be subtracted from the ACB then added on again (reinvested) leaving a neutral situation.
Member
Apr 29, 2012
430 posts
435 upvotes
Porcina wrote: You would not subtract the Return of Capital (ROC) from the Adjusted Cost Base(ACB) if the ROC was reinvested and not received as cash. Mathematically, the amount of ROC would be subtracted from the ACB then added on again (reinvested) leaving a neutral situation.

Ok,
sorry for being a knob, I just want make sure I understand you correctly. In the example I gave my
capital gains or lost would be:

Capital gains = sale price of all units – purchase price of all units i.e. book value

Is this correct?
Thank you
Deal Addict
Mar 7, 2006
1291 posts
56 upvotes
you don't get taxed on ROC. it shrinks your ACB... most G/L reports already have the correct numbers for both but it may be worthwhile to double check
Member
Apr 29, 2012
430 posts
435 upvotes
rabblerouser wrote: you don't get taxed on ROC. it shrinks your ACB...

That part I got. The change in ACB does affect your capital gain, what I
am trying to understand and get straight is given the example above, is my assessment,
that is my equations, correct?

Thank you.

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