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Discussion Starter #1
Hi Everyone,

I'm new to this forum and hope this does not repeat any posts out there as I did not find one in my search.:confused:

I currently hold shares of a IA Clarington Dividend A mutual fund (closed fund now) that pays a monthly distribution as a return of capital. This is obviously reducing my ACB, so what happens when it approaches zero?

Thanks.
 

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It can't go negative. If they have returned all your capital, any future distributions have to be from earnings or capital gains. Mutual Funds are not generally structured to pay return of capital (ROC) indefinitely. Monthly income funds use ROC to keep up distribution payments during periods when market returns are low.
 

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If return of capital distributions put your ACB below zero, then you start claiming capital gains each year to bring your ACB back to zero.


"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. Place a zero on line 131 since
there is no actual sale of units. The new ACB of the trust
units is deemed to be zero.
For example, Richard purchased RST Mutual Fund Trust
units for $1,000 in 2002 and received a $200 return of capital
in each of the 2003, 2004, 2005, 2006 and 2007 tax years. The
total return of capital by the end of 2007 is $1,000. In 2008,
he received an additional return of capital in the amount
of $200. On his 2008 tax return, Richard will report a capital
gain of $200. The ACB of his units will be reset to zero."

http://www.cra-arc.gc.ca/E/pub/tg/rc4169/rc4169-08e.pdf
 

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Discussion Starter #5
Thanks for the replies.

One more Q then: Another friend has a positive ACB for his Mfund and has been getting a tax slip (T3) for the ROC (dividends) he receives. If he is receiving dividends that is supposed to be a ROC yet does not have a zero ACB, then why is he getting a tax slip that requires him to pay capital gains?
 

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The tax slip should list the RoC, but that doesn't necessarily mean you have to pay tax on that if you have positive ACB. I'd have to look up the line/box numbers, but not all the lines/boxes on those slips actually result in tax payable (it always depends on your situation).

Also, if they're dividends, interest, other income, or capital gains distributions, then that's different than a RoC distribution. Depending on what is held, a mutual fund could distribute all of the above.
 

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If you're taking the return of capital distributions in cash and not reinvesting them, you may have other problems. I've read a few articles about this over the years. AIC used to have an upvesting brochure that talked about this. But can't find that. The only thing I can find on this online is this 2008 article from Investment Executive.

An unwise investment strategy?

Taking taxable distributions is fine, tax-wise (albeit a bad investment move, in my opinion). But the RoC portion of a distribution is not taxable; the CRA treats the outright sale of investments the same as taking RoC distributions in cash. If the RoC distribution is reinvested, full deductibility is intact. Use that RoC distribution to pay down loan interest or principal, [or any other personal use] and tax laws say that less than 100% of the interest is deductible.
 
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