Return of capital on leveraged mutual funds

6481 Views 7 Replies 4 Participants Last post by OhGreatGuru, Jan 27, 2010

savemoney

Discussion Starter · Dec 2, 2009

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.

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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OntFA

· #7 · Jan 27, 2010

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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