With the end of the tax season approaching I’ve been asked a few times about how to account for capital gains as a result of the sale of income trusts. Well, the process is basically the same as with common shares except with income trusts the cumulative “return of capital” (ROC) received from distributions must be accounted for in the adjusted cost base (ACB).
What is Return of Capital?
Basically return of capital is the tax deferred portion of income trust distributions. Return of capital can also be described as money the trust gives back to you from your original investment. The exact amount of ROC is provided to you annually by the trust.
What Do You Do With The ROC?
Once you’ve calculated the cumulative ROC you use it to re-calculate your ACB, which will be used to calculate your taxable capital gain when you sell. For example, suppose you paid $10 a unit and received a $1 per unit return of capital. Your adjusted cost base would be $9 ($10 - $1 = $9). Now if you sold that income trust for $12/unit your capital gain would be $3 dollars a share ($12 - $9 = $3) because your cost base was reduced from $10 to $9 due to some of your capital being returned in the form of a distribution. As is the case with common shares, only 50% of the capital gain on income trusts are taxed.
[I’m not an accountant so please consult your own tax professional before implementing any of the above advice.]