How does a return of capital affect an investor's net capital gain?

A return of capital impacts an investor's net capital gain by effectively reducing the adjusted cost base (ACB) of the investment. When an investor receives a return of capital, it is not considered income but rather a return of their original investment. This means that the amount of capital that has been returned is subtracted from the ACB, thereby decreasing the total amount that the investor has invested.

As a result, when the investor eventually sells the investment, the capital gain is calculated by subtracting the adjusted cost base (which is now lower due to the return of capital) from the selling price. This typically leads to a higher capital gain being realized, as the lower ACB increases the difference between the sale price and the adjusted cost base. Therefore, the net capital gain increases after accounting for the return of capital, making it important for investors to track these amounts in order to accurately compute their capital gains and any potential tax implications.

This understanding is critical as it underscores the importance of tracking returns of capital for accurate reporting of net capital gains, which may influence investment decisions and tax planning strategies.