Question

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L purchased 10,000 units of a mutual fund in the current year for $120,000. He received a T3 from the fund showing the following distributions for the current year which were reinvested in the fund:

Actual amount of eligible dividends: $6,000

Taxable amount of eligible dividends: $8,280

Capital gains: $4,000

Other investment income: $2,000

What is the adjusted cost base of L’s investment in the mutual fund at the end of the current year?

Answer 1

L purchased 10,000 units of a mutual fund in the current year for $120,000

Current Year Distributions:

Particulars	Amount($)
Actual Amount of Dividend	6,000
Capital Gains	4,000
Other Investment Income	2,000
Total Distributions net of taxes	12,000

Current year Distributions Net of taxes is reinvested.

Note: Taxable amount of eligible dividend ($8,280) is inclusive of Distribution taxes. Whereas Actual Amount of Dividend is the amount, net of Taxes. ($6,000).

Note: Tax on capital Gain is not given in Question, so ignored. If tax on capital gain is given in the question, then the amount should be taken net of taxes based on the tax bracket of the investor.

Return of capital(ROC)

ROC is a tax term used to describe distributions paid to unitholders that are in excess of a fund’s earnings (i.e., interest income, dividends and capital gains).

ROC is payment made to the investors to provide consistent cash flows to the investors out of the initial investment made by them.(in addition to the distributions made i.e., Interest, Capital Gain and Dividends)

ROC reduces the Adjusted Cost Base of the Investment.

Then, Adjusted Cost Base of Investment is

Adjusted Cost Base of Investment at the end of the year= Cost base of the Investment at the beginning of the year + Reinvestment of the current year distributions made net of taxes – Return of capital.