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Updated 2mo ago.
Updated 2mo ago.
Return of capital (ROC) is a distribution that returns a portion of your own invested money to you, rather than income generated by the fund. It's not immediately taxable but reduces the adjusted cost base (ACB) of your shares.
You buy 1,000 units of a covered call ETF at $20/unit (ACB = $20,000). The ETF pays $0.10 per month, of which $0.03 is ROC. After one year, you've received $0.36 of ROC per unit. Your ACB drops to $20,000 - $360 = $19,640. If you sell at $20/unit, your capital gain will be $360, not $0. ETFs like ZWB.TO or HDIV.TO often include ROC in their distributions.
ROC isn't necessarily bad — it can be a form of efficient tax deferral. But you need to understand what's happening: you're not really earning that amount, you're getting your own money back. An ETF with a 10% yield where half is ROC isn't performing as well as it looks. Always check the distribution breakdown on the issuer's website (T3 slip).