What is the impact of a return of capital on tax reporting?

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Multiple Choice

What is the impact of a return of capital on tax reporting?

Return of capital is treated as a return of part of your invested capital, not as taxable income in the year it’s received. Because of that, it lowers your adjusted cost base (ACB) of the investment. Since the ACB is what you use to measure your gain when you sell, reducing it means the same future sale will produce a larger capital gain. For example, if you bought an investment for 1,000 and you receive 200 as return of capital, your ACB drops to 800. If you later sell for 1,000, your capital gain is 200 instead of 0, and that gain is taxed at the capital gains rate. If ROC takes the ACB down to zero and more ROC is received, the excess is treated as a capital gain to that extent. So the tax reporting impact shows up at disposition, not in the year ROC is received, and ROC can increase future taxes by raising the realized capital gain.

Return of capital is treated as a return of part of your invested capital, not as taxable income in the year it’s received. Because of that, it lowers your adjusted cost base (ACB) of the investment. Since the ACB is what you use to measure your gain when you sell, reducing it means the same future sale will produce a larger capital gain. For example, if you bought an investment for 1,000 and you receive 200 as return of capital, your ACB drops to 800. If you later sell for 1,000, your capital gain is 200 instead of 0, and that gain is taxed at the capital gains rate. If ROC takes the ACB down to zero and more ROC is received, the excess is treated as a capital gain to that extent. So the tax reporting impact shows up at disposition, not in the year ROC is received, and ROC can increase future taxes by raising the realized capital gain.

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