# How to handle return of capital



## Amira (Aug 6, 2013)

Hello, I’m hoping to get advice on an issue I’m new to. One of my non-dividend paying US stocks has announced a “a special cash distribution of $1.75/share, which represents a surplus of corporate cash and is expected to be treated as a return of capital to stockholders.”

Since I hold this stock in both my TFSA and non-registered accounts, I’m want to understand what the implications are. Will any part of the distribution be withheld for any reason (similar to the 15% withholding of a dividend on a US stock held in a TFSA or non-registered account)? Are there implications to be aware of for next year’s tax return? Or does this cash distribution simply lower my ACB/share, which will ultimately affect my capital gain/loss upon sale of the stock?

Thanks in advance for any assistance with this.


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## Eclectic12 (Oct 20, 2010)

< response deleted >


What I was thinking is apparently not true ...



> Distributions made by foreign shares to Canadian shareholders are usually considered foreign dividends, 100% taxable. When distributions from US shares are categorized as capital gains or return of capital for US taxpayers, they will still be considered fully taxable to Canadian taxpayers.


http://www.taxtips.ca/personaltax/investing/taxtreatment/shares.htm


So it would appear from a Canadian tax perspective, the US stock RoC distribution should be reported on the Canadian tax return for the year the distributions was paid, as a foreign dividend.


I wouldn't expect the US to withhold dividend taxes as it's classed as RoC ... but since I was already mistaken about the Canadian tax treatment, I'd phone CRA, check a tax book or consult a professional.


Cheers


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## AltaRed (Jun 8, 2009)

If the OP wants to know earlier rather than later, then a call to CRA would be a start. or better yet, pose the question on Serbinski's cross-border forum http://forums.serbinski.com/ where there is lots of expertise in these issues. Or lastly, presume that your broker will get it right on the T5 when it is issued 1Q14.


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## humble_pie (Jun 7, 2009)

myself, i'd be inclined to skip all this, unless i held like 40,000 shares or was somehow a heavyweight in this company.

if i were just an ordinary investor & if i had a paper gain in this stock, i'd find out the record date & i would aim to sell my non-registered holding by the day prior to record date at the latest. I'd start tracking the security extremely closely, watching advanced charts, looking for the best possible price between now & day-before-record.

my capital gain would be taxable at 50% only, no doubt about that.

meanwhile in my tfsa, i'd probably keep the other part of the holding, if i thought its fundamentals were still holding up. Everything in a tfsa is just what its name implies, ie tax-free, so i would get to keep my return of capital distribution in tfsa with nary a penny of tax owing, no matter what the bureaucrats or the forummers would have to say about that.


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## Amira (Aug 6, 2013)

I appreciate the prompt advice and suggestions for avenues to look into (CRA, Serbinski, sell before record date). Thanks, everyone.


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> ... meanwhile in my tfsa, i'd probably keep the other part of the holding, if i thought its fundamentals were still holding up.
> 
> Everything in a tfsa is just what its name implies, ie tax-free, so i would get to keep my return of capital distribution in tfsa with nary a penny of tax owing, no matter what the bureaucrats or the forummers would have to say about that.


Since the OP said " ... is expected to be treated as a return of capital ... ", I'm thinking the critical part for the TFSA is likely the IRS (or whatever agency in the US that determines this). 

Should the surplus corporate cash somehow be determined to be subject to US withholding taxes, the 15% will likely be long gone before the payment hits the TFSA.


There's no reason to believe the company has made a mistake about how it will be treated but without confirmation from the deciding authority, there is a chance that YMMV.


Cheers


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## Amira (Aug 6, 2013)

To close the loop on this thread...I called CRA and was told that the ROC does not need to be reported as dividend income in any of my accounts (well, TFSA is moot, but even the non-reg one is exempt apparently). The only impact is a lowered ACB which will matter when the stock is sold.

Frankly I was expecting to hear something more in line with the TaxTips website interpretation that ROC on a US stock would be treated as a foreign dividend. Being dubious of good fortune, I may call CRA another day and see if another agent gives me a similar answer or not.

I also checked with RBC as to what to expect in terms of tax slips, and was told that I would get a T3 with the code "ROC", that there were no tax implications, and I should just ensure to keep records for ACB purposes. The agent conferred with RBC's tax division before giving me this answer.


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## Eclectic12 (Oct 20, 2010)

Amira said:


> To close the loop on this thread...I called CRA and was told that the ROC does not need to be reported as dividend income in any of my accounts (well, TFSA is moot, but even the non-reg one is exempt apparently). The only impact is a lowered ACB which will matter when the stock is sold.


This is good news ... 




Amira said:


> Frankly I was expecting to hear something more in line with the TaxTips website interpretation that ROC on a US stock would be treated as a foreign dividend. Being dubious of good fortune, I may call CRA another day and see if another agent gives me a similar answer or not.


 ... and this is a good plan .... 




Amira said:


> I also checked with RBC as to what to expect in terms of tax slips, and was told that I would get a T3 with the code "ROC", that there were no tax implications, and I should just ensure to keep records for ACB purposes. The agent conferred with RBC's tax division before giving me this answer.


I suspect the "no tax implications" is based on the assumption that since this stock rarely had passed on RoC, the ACB is assumed to be positive.
\

There's lots of web site including CRA's that make mention that when the ACB falls negative, the RoC portion is reported in that tax year as a capital gain.



> If the ACB of the trust units is reduced below zero during the tax year, the negative amount is deemed to be a capital gain in the year.
> Enter the amount of the capital gain on line 132 of your Schedule 3.


http://www.cra-arc.gc.ca/E/pub/tg/rc4169/rc4169-e.html
http://www.taxtips.ca/personaltax/investing/taxtreatment/incometrusts.htm


As I say - if there aren't a lot of RoC distributions by the stock, there's basically no chance the ACB will be negative.


Cheers


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