Return of Capital

Return of Capital (RoC) is not income — it's your own invested money coming back to you. Unlike dividends, RoC is not taxable when received. Instead, it reduces your cost base and, critically for leveraged investors, reduces the borrowed portion of your investment.

Why RoC matters for deductibility

When you receive RoC on a position funded with borrowed money, the borrowed cost base decreases. The borrowed capital that was “invested” returns as uninvested borrowed cash. Your invested principal shrinks — and with it, the portion of your debt that generates deductible interest.

The effect is retroactive. You receive distributions throughout the year, but the final RoC breakdown often doesn't arrive until the T3 slip in February or March of the following year. When you record the correct RoC, the app recalculates all interest allocations from the distribution date forward.

How the split works

RoC is allocated based on the borrowed/personal ratio of the position at the time of distribution. If your position is 80% borrowed, 80% of any RoC reduces borrowed cost and returns as borrowed cash.

The non-RoC portion of a distribution (dividends, interest, capital gains) is income. It goes entirely to personal cash and doesn't affect your cost base or the invested/uninvested split.

Worked example

You hold 500 units of an ETF with a $12,500 cost base: $10,000 borrowed (80%), $2,500 personal (20%). The ETF pays $0.10/unit, of which $0.04 is RoC.

Total distribution: $50 (500 × $0.10)
RoC portion: $20 (500 × $0.04)
Income portion: $30
Borrowed portion of RoC: $16 (80% of $20)
Personal portion of RoC: $4 (20% of $20)

After: invested principal decreases by $16, borrowed cash increases by $16, cost base drops by $20. The income portion ($30) plus personal RoC ($4) go to personal cash.

Here's how this looks in the app's event detail view:

Investment Distribution — 500 units of ETF at $0.10/unit

Distribution of $50.00: $30.00 income to personal cash, $20.00 return of capital (80% borrowed). Invested principal decreases by $16.00; borrowed cash increases by $16.00.

	Before	Change	After
Deductible Principal	$25,000.00	-$16.00	$24,984.00
Invested Principal	$25,000.00	-$16.00	$24,984.00
Non-Deductible Principal	$5,000.00	+$16.00	$5,016.00

The compounding effect over time

A single distribution moves small amounts. But over a year of monthly distributions, the cumulative effect adds up. With $20/month in RoC on an 80% borrowed position, $192 of invested principal shifts to uninvested status over 12 months.

If you don't reinvest the accumulated borrowed cash, your invested principal gradually erodes — and so does the deductible proportion of your interest.

What to do with accumulated borrowed cash

Reinvest it — buy more securities with the borrowed cash to move it back to invested status. This maintains your deductible interest.
Leave it as cash — the debt remains as non-deductible principal. The app tracks it conservatively, though the CRA may allow deductions while actively seeking investments.
Withdraw it — the cash leaves your brokerage but the debt was already non-deductible, so credit-side balances don't change.

Finding RoC information

T3 tax slips (February–March for the previous year): Box 42 shows return of capital. This is the definitive number.

Fund company websites: Many ETF providers publish monthly or annual distribution breakdowns. Check the “distributions” or “tax information” section for estimated figures during the year.

You can record distributions with estimated RoC and adjust later when the final T3 arrives. The app recalculates everything from that point forward.

CRA basis

Return of capital reduces the adjusted cost base (ACB) of your investment. Per Income Tax Folio S3-F6-C1, when borrowed money is returned (through RoC or sale), the return follows the same tracing as the original investment. If the position was 80% borrowed, 80% of the capital returned is borrowed capital.