How do 'return of capital' and 'adjusted cost base' interact for tax purposes?

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Multiple Choice

How do 'return of capital' and 'adjusted cost base' interact for tax purposes?

Return of capital is not income for tax purposes. It represents a return of part of your original investment and, to reflect that, it reduces your adjusted cost base (ACB) of the investment. The ACB tracks your basis in the holding, so every ROC receipt lowers that basis, which in turn reduces the amount of gain you would recognize when you sell. The ACB cannot go below zero. If you receive more return of capital than your remaining ACB, the excess does not further reduce cost basis. Instead, those additional ROC amounts effectively become capital gains when you eventually dispose of the investment, with only a portion of the gain being taxable (in Canada, 50% of capital gains is included in income for individuals). In short, ROC lowers ACB until it reaches zero; once zero, further ROC is realized as capital gains on sale.

Return of capital is not income for tax purposes. It represents a return of part of your original investment and, to reflect that, it reduces your adjusted cost base (ACB) of the investment. The ACB tracks your basis in the holding, so every ROC receipt lowers that basis, which in turn reduces the amount of gain you would recognize when you sell.

The ACB cannot go below zero. If you receive more return of capital than your remaining ACB, the excess does not further reduce cost basis. Instead, those additional ROC amounts effectively become capital gains when you eventually dispose of the investment, with only a portion of the gain being taxable (in Canada, 50% of capital gains is included in income for individuals). In short, ROC lowers ACB until it reaches zero; once zero, further ROC is realized as capital gains on sale.

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