# Return of Capital



## Brian K (Jan 29, 2011)

I recently started buying investments that include as part of the total yield a "Return of Capital". My T3/Box 42 shows a number but when intered into Turbo Tax seems to have no effect on my taxable income.
I am under the impression that this number is used to reduce the initial purchase price of the stock so ultimately affects the Capital Gains that get reported to CRA when I sell the stock.
IE - if I buy say $1000 of Company X, hold it for 2 years and each year show a return of capital of $100, then sell it for $1500 - the reported Capital Gains would be ($1500 - $1000 - 2*$100) $700.
Is this correct?


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## Eclectic12 (Oct 20, 2010)

Brian K said:


> I recently started buying investments that include as part of the total yield a "Return of Capital". My T3/Box 42 shows a number but when intered into Turbo Tax seems to have no effect on my taxable income.
> I am under the impression that this number is used to reduce the initial purchase price of the stock so ultimately affects the Capital Gains that get reported to CRA when I sell the stock.
> IE - if I buy say $1000 of Company X, hold it for 2 years and each year show a return of capital of $100, then sell it for $1500 - the reported Capital Gains would be ($1500 - $1000 - 2*$100) $700.
> Is this correct?


It is correct - Turbo Tax is ignoring the RoC as it applies when you sell or 
the Adjusted Cost Base for the investment hits zero or is negative.

Here is a URL about income trusts, where the RoC distributions tend to a much higher percentage:
http://www.taxtips.ca/personaltax/investing/taxtreatment/incometrusts.htm


I noticed that the comissions are missing as well. IMO, it is important to stay on top of the calculations as an ACB of zero/negative means the RoC distribution in future is reported on the tax return as a capital gain. 

Again - Turbo Tax will ignore it as like selling the 100 Company X shares, it is up to you to realise that it is time to report this type of capital gain.


So here is step by step, my understanding of what should be happening, over time:

January of year 1 - buy 100 shared of Company X for $1000

Adjusted Cost Base for 100 Company X shares
= cost + commission = $1000 + $10 = $1010


December year 1 - $100 Return of Capital Reported

Re-calcuate ACB for 100 Company X shares
= current ACB - RoC = $1010 - $100 = $910

Is ACB = or less than zero? 
If yes, future RoC is reported as a capital gain on future tax returns. 
If not, continue.


December year 2 - $100 RoC reported

Re-calculate ACB for 100 Company X shares
= current ACB - RoC = $910 - $100 = $810

ACB is still positive, continue.

Jan Year 3 - sell 100 Company X shares for $1500

Year 3 Tax Return - Schedule 3 Capital Gains 
Capital Gains for shares sold 
= Proceeds - ACB - comission
= $1500 - $810 - $10 
= $680


Note that another reason to keep current for the calculations
is if you sell 50 shares after two years and then the rest after
another two years (i.e. half are sold after two years and the
other have at four years). 

The second 50 shares sold at a later date will have an additional comissision 
(three in total instead of two) and additional RoC payments (2 more years 
at $100 per year) which will change the capital gains which reported on two 
separate tax returns (i.e. one in year 2 and one in year 4).


If this all seems complicated - take a deep breath and remember the math is simple.
The trick is knowing all the components. 


Cheers


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## Brian K (Jan 29, 2011)

Thanks for the explanation/confirmation of my assumptions. (I left out the commissions for simplicity but realize that they also form part of the ACB).


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## Eclectic12 (Oct 20, 2010)

Brian K said:


> Thanks for the explanation/confirmation of my assumptions. (I left out the commissions for simplicity but realize that they also form part of the ACB).


I thought that might be the case but wanted to be sure.

It took me a while to figure out the RoC for the trusts I bought as I had
previously had stocks that only paid dividends. The RoC calculations were
an unpleasant surprise. Now that I understand the process and have a
system setup, it's not much more difficult than reconciling a credit card
statement.


Cheers


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