ACB for Canadian ETFs: Return of Capital and Reinvested (Phantom) Distributions
Published by 
Steffan Kharmaaiarvi, founder
The adjusted cost base (ACB) of a Canadian-listed ETF is rarely just what the client paid. Two items in the fund's year-end tax breakdown move it: return of capital, which lowers ACB, and reinvested (non-cash, sometimes called phantom) distributions, which are taxed in the year and raise it. Brokers' book values often miss one or both, so a gain computed from a statement can be overstated or understated. This note explains the rules, where the per-unit figures come from, how the average-cost rule pools units across accounts, and a worked example with XEQT's actual 2025 figures. It is decision support, not tax advice.
Average cost, per person
Units of the same ETF are identical properties. CRA's guidance on identical properties gives units of a mutual fund trust as an example and requires the average cost to be recalculated at each purchase: total cost divided by total units held. A sale does not change the ACB per unit of what remains. The pool is the client's, not the account's: identical units in two non-registered accounts at different brokers form one ACB. Each foreign-currency purchase is converted to Canadian dollars at the rate for the day it arose (Income Tax Act, s. 261(2)(b)).
Return of capital lowers ACB
A distribution of capital by a trust reduces the ACB of the unitholder's interest (s. 53(2)(h)). On the T3 slip it appears in box 42, Amount resulting in cost base adjustment; CRA's Guide T4037 says a positive box 42 amount is subtracted from the ACB of the units and a negative one added. ACB cannot go below nil (s. 54, definition of adjusted cost base): if return of capital would take it below zero, the excess is deemed a capital gain in that year (s. 40(3)) and the ACB is reset to zero.
Reinvested distributions raise ACB
Many Canadian ETFs make a year-end distribution of income or capital gains that is not paid in cash but reinvested. The holder is taxed on it in that year all the same, so it is added to the cost of the units; otherwise the same amount would be taxed again on sale. T4037's example on identical properties shows reinvested distributions added to the cost and the average recalculated. Issuers publish the amount per unit: BlackRock's 2025 distribution characteristics for iShares Canadian funds has a Reinvested Distribution Per Unit column beside the cash one.
Where the figures come from
Each issuer sends its funds' tax breakdowns to CDS, and the investor's broker issues the T3 slip. BlackRock's 2025 document states that the characteristics were provided to CDS on 11 February 2026, with a 16 March 2026 deadline for dealers to mail T3 slips. The same figures, per record date and per unit, are in the issuers' own documents:
- iShares (BlackRock Canada): per distribution, with columns mapped to T3 boxes (box 42 return of capital, box 34 foreign tax paid).
- Vanguard Canada: its 2025 distribution history gives return of capital as a year total per unit (for VFV, CAD 0.00111 in 2025), not per distribution.
Per record date matters: a unit counts for a distribution only if it is held on that record date, so purchases during the year change which distributions apply to which units.
A worked example with XEQT's 2025 figures
Illustrative client, one non-registered pool across two brokers. Purchases are invented; the per-unit figures are XEQT's actual 2025 numbers from BlackRock's document.
| Date (2025) | Event | Units | Per unit (CAD) | ACB change (CAD) |
|---|---|---|---|---|
| 2 Jan | Buy at broker A, CAD 30.00 | 1,000 | 30.00 | +30,000.00 |
| 26 Mar | Return of capital | 1,000 | 0.00609 | −6.09 |
| 25 Jun | Return of capital | 1,000 | 0.01808 | −18.08 |
| 1 Jul | Buy at broker B, CAD 34.00 | 500 | 34.00 | +17,000.00 |
| 24 Sep | Return of capital | 1,500 | 0.00677 | −10.16 |
| 30 Dec | Return of capital | 1,500 | 0.01391 | −20.87 |
| 30 Dec | Reinvested distribution | 1,500 | 0.32215 | +483.23 |
- Cost paid: 30,000 + 17,000 = CAD 47,000.
- Return of capital: 6.09 + 18.08 + 10.16 + 20.87 = CAD 55.20 off the ACB.
- Reinvested distribution: 1,500 × 0.32215 = CAD 483.23 added; it is also taxable income for 2025.
- ACB at 31 December 2025: 47,000 − 55.20 + 483.23 = CAD 47,428.03, or CAD 31.6187 a unit across 1,500 units. A statement showing book value of CAD 47,000 would overstate a later gain by CAD 428.03.
- Two brokers, one ACB. If the client sells the 500 units at broker B, the cost is 500 × 31.6187 = CAD 15,809.35, not the CAD 17,000 broker B reports.
What Borderfolio shows
- ACB replayed from the ledger. For a Canadian resident, the cost of each holding is replayed from the confirmed transactions under Canada's rule: average cost of identical properties, pooled across all the client's non-registered accounts, each purchase converted at its own date's exchange rate.
- Issuer adjustments per record date. A catalogue of 71 Canadian-listed funds (iShares, Vanguard, BMO, Global X and others; 2019 to 2025), every row with the issuer document it was read from, applies return of capital and reinvested distributions per unit held on each record date. Vanguard's year-total return of capital is placed on the year's last record date, and the finding says so.
- Gaps named. A fund outside the catalogue is named, and its ACB is marked as excluding these adjustments. A year where part of the issuer's breakdown could not be sourced is named too. An ACB taken below zero is held at zero and flagged as a gain in that year.
- The ACB feeds the T1135 cost test, the departure tax estimate and the cost of a switch in Scenarios.
Not modelled: units bought before the imported history (their cost is unknown, never guessed), adjustments for 2026 until issuers publish them, and funds outside the catalogue. See the cross-border documentation.
Frequently asked questions
Does return of capital reduce the ACB of an ETF?
Yes. A distribution of capital by a trust reduces the ACB of the units (Income Tax Act s. 53(2)(h)); it is shown in box 42 of the T3 slip. If the ACB would go below zero, the excess is a capital gain in that year.
Why do reinvested distributions increase ACB?
Because they are taxed in the year they are made even though no cash is paid. Adding them to the cost stops the same amount being taxed again when the units are sold.
Is ACB calculated per account or per person?
Per person. Identical units held in the client's non-registered accounts are pooled at their average cost, whichever broker holds them.
Where do the return of capital and reinvested figures come from?
From each fund's annual tax breakdown, which the issuer sends to CDS for T3 slips and publishes itself, per unit and per record date (Vanguard Canada gives return of capital as a year total).