17.2 Taxation of Investment Income

Canadian Securities Course CSC

Track your progress as you read

Finished sections get a check mark.

1 Introduction & Exam Overview

About the CSC Exams

2 Chapter 1: The Canadian Investment Marketplace

1.1 The Canadian Securities Industry & the Investment Dealer's Role 1.2 Financial Intermediaries: Banks, Trusts, Credit Unions, Insurers & Pension Funds 1.3 Financial Market Trends 1.4 Investment Capital, Financial Instruments & Financial Markets 1.5 Canadian Exchanges, ATSs, Dark Pools & the Order Protection Rule 1.6 Canadian Securities Regulators, the CSA & CIRO 1.7 Investor Protection: OSFI, CIPF and CDIC 1.8 Ethics, Standards of Conduct & the Client Focused Reforms 1.9 Conflicts of Interest, Complaint Handling & Remediation

3 Chapter 2: The Economy

2.1 Economics Foundations & Measuring Economic Growth 2.2 The Business Cycle & Economic Indicators 2.3 Inflation & Interest Rates 2.4 The Labour Market & Unemployment 2.5 The Bank of Canada & the Inflation-Control Target 2.6 Implementing Monetary Policy: The Operating Band, Market Operations & Transmission 2.7 Fiscal Policy, Deficits & the Challenges of Government Policy 2.8 International Finance & Trade: The Balance of Payments and the Canadian Dollar

4 Chapter 3: Features and Types of Fixed-Income Securities

3.1 The Fixed-Income Marketplace, Bond Terminology & Security 3.2 Protective Covenants, Retirement Provisions & Extendible/Retractable Features 3.3 Government of Canada Securities: T-Bills, Marketable Bonds & RRBs 3.4 Provincial & Municipal Debt and Strip Bonds 3.5 Corporate Bonds, Credit Spreads & Bond Ratings 3.6 Money Market Instruments, Floating-Rate Notes & International Bonds 3.7 Other Fixed-Income Securities & Reading Bond Quotes

5 Chapter 4: Pricing and Trading of Fixed-Income Securities

4.1 Bond Pricing, Price–Yield Relationships & Accrued Interest 4.2 Yield Calculations & Return Measures 4.3 The Term Structure of Interest Rates & Yield Curve Theories 4.4 Fundamental Bond Pricing Properties: Volatility Rules, Duration & Convexity 4.5 Bond Market Trading & Bond Indexes

6 Chapter 5: Common and Preferred Shares

5.1 Common Shares: Ownership Rights, Voting & Restricted Shares 5.2 Dividends, DRIPs, Stock Splits & Consolidations 5.3 Preferred Shares: Features, Cumulative Dividends & Taxation 5.4 Preferred Share Variations: Convertible, Callable, Retractable, Floating & Rate-Reset 5.5 Fundamental Equity Metrics & Ratios 5.6 Stock Indexes & Averages

7 Chapter 6: Equity Transactions

6.1 Order Types, Execution & Market Mechanics 6.2 Margin Trading: Long Accounts & Borrowing 6.3 Short Selling & Short-Margin Requirements 6.4 Trading & Settlement Procedures: T+1, CDS & Confirmations

8 Chapter 7: Derivatives

7.1 Derivatives: Role, Underlying Assets & Users 7.2 Options Fundamentals: Calls, Puts & Moneyness 7.3 Option Strategies & Risk Management 7.4 Forward & Futures Contracts 7.5 Rights & Warrants

9 Chapter 8: Corporations and their Financial Statements

8.1 Corporate Structures & Corporate Governance 8.2 The Annual Report, Accounting Standards & the Auditor's Report 8.3 The Balance Sheet & Income Statement 8.4 The Cash Flow Statement & Earnings Quality 8.5 Public Company Disclosure, Investor Rights, Take-Over Bids & Insider Trading

10 Chapter 9: Financing and Listing Securities

9.1 Government & Corporate Financing: Underwriting and Syndicates 9.2 The Prospectus Process, Stabilization & Purchaser Rights 9.3 The Exempt Market & Private Placements 9.4 The Listing Process: TSX, TSXV & Capital Pool Companies 9.5 Continuous Disclosure, Material Changes & Insider Reporting

11 Chapter 10: Investment Analysis

10.1 Methods of Equity Analysis & Macroeconomic Analysis 10.2 Fundamental Industry Analysis 10.3 Company Analysis: Competitive Advantages, Governance & the Dividend Discount Model 10.4 Discounted Cash Flow & Relative Valuation Multiples 10.5 Financial Statement Ratio Analysis 10.6 Assessing Preferred Share Investment Quality 10.7 Technical Analysis: Charts, Trends & Patterns 10.8 Technical Indicators, Volume, Breadth & Sentiment

12 Chapter 11: Portfolio Analysis

11.1 Measuring Investment Return 11.2 Measuring Risk: Types of Risk, Standard Deviation & Downside Measures 11.3 Portfolio Risk & Return: Correlation and Diversification 11.4 Beta, the Capital Asset Pricing Model & the Security Market Line 11.5 Portfolio Manager Styles: Equity & Fixed Income 11.6 The Portfolio Management Process: Objectives, Constraints & the IPS 11.7 Asset Mix, Monitoring, Performance Evaluation & Rebalancing

13 Chapter 12: Alternative Investments, Other Managed, and Structured Products

12.1 Alternative Investments: Structures, Fees & Liquid Alternatives 12.2 Alternative Strategies, Performance Measurement & Due Diligence 12.3 Segregated Funds, Labour-Sponsored Funds & Listed Private Equity 12.4 Income Trusts, REITs & Closed-End Funds 12.5 Structured Products: PPNs & Market-Linked GICs 12.6 Split Shares & Asset-Backed Securities

14 Chapter 13: Mutual Funds

13.1 Managed Products & Mutual Fund Structure 13.2 Pricing Mutual Fund Units: NAVPS & Forward Pricing 13.3 Mutual Fund Fees, Sales Charges & Unit Series 13.4 Mutual Fund Regulation, Fund Facts & Account Opening 13.5 Types of Mutual Funds & Fund Management Styles 13.6 Redemptions, Withdrawal Plans & Measuring Fund Performance

15 Chapter 14: Exchange-Traded Funds (ETFs)

14.1 ETF Origins, Structure, Tax Efficiency & ETF Facts 14.2 ETF Creation, Redemption & Arbitrage 14.3 Types of ETFs & Advanced Strategies 14.4 Comparing ETFs, Mutual Funds & Individual Securities

16 Chapter 15: Working with the Institutional Client

15.1 The Institutional Marketplace & Institutional Clients 15.2 Institutional Investment Guidelines, Styles & Restrictions 15.3 Buy Side & Sell Side: Trading Desks, Revenue, Clearing & Best Execution 15.4 Block Trading, Dark Pools & Algorithmic Trading

17 Chapter 16: Fee-Based Accounts and Working with the Retail Client

16.1 Fee-Based Accounts: Managed & Non-Managed Models 16.2 Fee Transparency, CRM2 & Total Cost Reporting, and MWRR vs. TWRR 16.3 The Financial Planning Approach & the Life Cycle 16.4 Behavioral Finance, Sequence-of-Returns Risk & Client Coaching 16.5 Estate Planning Basics

18 Chapter 17: Canadian Taxation

17.1 The Canadian Taxation System 17.2 Taxation of Investment Income 17.3 Capital Gains, Losses & The Superficial Loss Rule 17.4 Registered vs Non-Registered Tax-Advantaged Accounts 17.5 Tax Planning Strategies, Pension Plans & the RDSP

17.2 Taxation of Investment Income

Key Takeaways Explain This Topic AI

Investment income in Canadian taxable non-registered accounts follows a strict tax hierarchy: interest and foreign income are 100% taxable at ordinary marginal rates, Canadian dividends receive preferential gross-up and tax credit treatment, and capital gains enjoy a 50% inclusion rate.

Accrued interest on zero-coupon instruments and strip bonds must be calculated and reported annually to the Canada Revenue Agency (CRA) on an accrual basis, even though no physical cash is received until maturity.

The Canadian dividend integration mechanism eliminates double taxation through the dividend gross-up and federal/provincial Dividend Tax Credit (DTC), distinguishing between eligible dividends (38% gross-up, 15.02% federal DTC) and non-eligible dividends (15% gross-up, 9.03% federal DTC).

Foreign dividends and foreign interest received in taxable accounts do not qualify for the Canadian dividend tax credit; they are fully taxable at marginal rates, though foreign withholding taxes deducted at source may be claimed as a Foreign Tax Credit (FTC) to mitigate international double taxation.

Return of Capital (ROC) distributions are non-taxable when received, reducing the investor's Adjusted Cost Base (ACB) dollar-for-dollar; if cumulative ROC reduces the ACB below zero, the negative balance is deemed an immediate taxable capital gain.

Last updated: October 2026

In Canadian wealth management, an investor's net wealth accumulation depends not only on the gross pre-tax returns generated across capital markets, but fundamentally on the after-tax yield retained after satisfying federal and provincial tax liabilities. The Canadian federal Income Tax Act does not treat all investment income equally. Depending on whether an investment produces interest, Canadian dividends, foreign dividends, capital gains, or a return of capital, the effective tax rate varies substantially.

Understanding these distinct tax rules is crucial for financial advisors and registered representatives when recommending asset allocations, evaluating product structures, and designing tax-efficient portfolios in non-registered (taxable) accounts.

1. The Canadian Investment Income Tax Hierarchy

For an individual holding securities in an open, non-registered account, investment returns are categorized into four primary income types. These categories form a distinct hierarchy of tax efficiency, ranging from the most heavily taxed to the most tax-advantaged: Tax Efficiency Hierarchy in Canadian Taxable Accounts:

• Most Heavily Taxed (Lowest After-Tax Retention)
• ▲ 1. Interest Income & Foreign Income (100% taxable at regular marginal rate)
• │ 2. Non-Eligible Canadian Dividends (15% gross-up, 9.03% federal DTC)
• │ 3. Eligible Canadian Dividends (38% gross-up, 15.02% federal DTC)
• ▼ 4. Realized Capital Gains (50% inclusion rate; tax deferred until sale)
• Most Tax-Advantaged (Highest After-Tax Retention)
• Interest Income: Fully Taxable

Interest income represents compensation paid by a borrower for the use of borrowed capital. Common sources include:

• Government of Canada, provincial, and municipal bonds
• Corporate debentures and commercial paper
• Guaranteed Investment Certificates (GICs) and term deposits
• Savings account balances and cash equivalents
• Treasury bills (T-bills)

Under the Income Tax Act , interest income is 100% taxable at the investor's top marginal tax rate ( M T R MTR MTR ) . It receives no preferential tax rates, deductions, or tax credits. An investor in a combined federal/provincial 50% marginal tax bracket surrenders exactly half of all interest earned to the government. Consequently, in an inflationary environment, fixed-income yields in taxable accounts frequently generate negative real after-tax returns.

Fixed Income and the Annual Accrual Rule

For conventional coupon-bearing debt, interest is reported and taxed in the calendar year it is received or becomes receivable. However, specific rules govern discount debt instruments, such as strip bonds (zero-coupon bonds) and deep-discount notes :

The Annual Accrual Requirement: Although strip bonds pay no periodic cash flow and provide their entire return as a lump sum at maturity, the Canada Revenue Agency (CRA) mandates that investors calculate and report accrued interest annually on an accrual accounting basis .

Phantom Income: The annual increase in the present value of the bond is deemed to be interest income. Investors must pay tax each year on this "phantom interest," despite receiving zero cash flow until the bond matures or is sold.

Tax Reporting: Financial institutions issue a T5 Supplementary slip (Box 13) or T3 slip detailing the imputed annual interest amount that must be included on Line 12100 of the investor's T1 General return.

• Investment Income Type Tax Inclusions / Adjustments Federal Tax Reporting Slip Effective Tax Ranking
• Interest Income 100% of income taxed at ordinary marginal rates Form T5 (Box 13) Least Efficient (Highest Tax)

Foreign Dividends 100% of gross dividend taxed at ordinary marginal rates; foreign tax credit eligible Form T5 (Box 15 & 16) Least Efficient (Equal to Interest)

• Non-Eligible Dividends 15% gross-up; 9.0301% federal DTC applied Form T5 (Box 10 & 11) Moderately Efficient
• Eligible Dividends 38% gross-up; 15.0198% federal DTC applied Form T5 (Box 24 & 25) Highly Efficient

Capital Gains 50% inclusion rate; taxed only upon realization Form T5008 / Schedule 3 Most Efficient (Lowest Tax)

Return of Capital (ROC) 0% immediate tax; reduces Adjusted Cost Base (ACB) Form T3 (Box 42) Tax-Deferred Capital Growth

2. The Mechanics of Canadian Dividend Integration

When a Canadian corporation earns profit, that profit is subject to corporate income tax. If the corporation subsequently distributes its after-tax earnings to individual shareholders as dividends, taxing those dividends as regular income would result in double taxation —the same dollar of economic profit would be taxed first at the corporate level and then at the personal level.

To eliminate this inequity, the Canadian tax system relies on the Integration Theory . Integration seeks to ensure that the total tax paid on corporate earnings distributed to an individual shareholder equals the tax the individual would have paid had they earned the income directly as a sole proprietor.

Corporate Tax Paid + Personal Tax Paid ≈ Individual Personal Tax on Direct Earnings \text{Corporate Tax Paid} + \text{Personal Tax Paid} \approx \text{Individual Personal Tax on Direct Earnings} Corporate Tax Paid + Personal Tax Paid ≈ Individual Personal Tax on Direct Earnings

Integration is achieved through a two-step mechanism:

The Dividend Gross-Up: The actual cash dividend received by the shareholder is "grossed up" (increased) to reflect the corporation's pre-tax profit.

The Dividend Tax Credit (DTC): The individual calculates tax on the grossed-up amount, and is then granted a non-refundable federal and provincial tax credit that reflects the corporate income tax already paid by the corporation. The Integration Mechanism Flow:

• [ Corporation Pre-Tax Profit: \$1,380 ]
• │
• ├──> Corporate Income Tax Paid (~27.5%): \$380
• │
• ▼
• [ Cash Dividend Paid to Shareholder: \$1,000 ]
• │
• ├──> Personal Tax Step 1: Gross-up by 38% (Taxable Dividend = \$1,380)
• ├──> Personal Tax Step 2: Compute Gross Personal Tax at Marginal Rate
• └──> Personal Tax Step 3: Deduct Federal & Provincial DTCs (Offset corporate tax)
• │
• ▼
• [ Net Personal Tax Paid: \$344.72 ]
• The Two Categories of Canadian Dividends

Canadian tax law establishes two distinct categories of taxable dividends, depending on the corporate tax rate paid by the distributing entity:

1. Eligible Dividends

Source: Paid out of corporate income that was subject to the general (higher) corporate tax rate (approximately 26.5% to 27% combined federal/provincial). This includes Canadian public corporations listed on the TSX or TSX Venture Exchange, as well as Canadian-Controlled Private Corporations (CCPCs) earning active business income in excess of the small business limit, tracked through their General Rate Income Pool (GRIP) .

Gross-Up Rate: 38% of the cash dividend. The taxable dividend reported on Line 12000 of the tax return equals Cash Dividend × 1.38 \text{Cash Dividend} \times 1.38 Cash Dividend × 1.38 .

Federal Dividend Tax Credit: Exactly 15.0198% (commonly cited as 15.02% ) of the grossed-up dividend, which is equivalent to 6 11 \frac{6}{11} 11 6 ​ of the gross-up amount.

Provincial Dividend Tax Credit: Each province provides a corresponding provincial DTC (ranging from approximately 5.4% to 11.5% of the grossed-up amount) to offset provincial corporate taxes.

2. Non-Eligible Dividends (Ordinary Dividends)

Source: Paid by CCPCs out of income subject to the preferential small business deduction rate (typically 9% federal, ~12% combined) or investment income, tracked through their Low Rate Income Pool (LRIP) .

Gross-Up Rate: 15% of the cash dividend. The taxable dividend equals Cash Dividend × 1.15 \text{Cash Dividend} \times 1.15 Cash Dividend × 1.15 .

Federal Dividend Tax Credit: Exactly 9.0301% (commonly cited as 9.03% ) of the grossed-up dividend, which is equivalent to 9 13 \frac{9}{13} 13 9 ​ of the gross-up amount.

Provincial Dividend Tax Credit: A lower provincial tax credit matching the reduced small business corporate tax rate.

Comparison: Eligible vs. Non-Eligible Dividends

Feature Eligible Dividends Non-Eligible (Ordinary) Dividends

Corporate Source Public corporations & CCPCs taxed at general rate CCPCs taxed at small business rate (< $500k active income)

• Corporate Account General Rate Income Pool (GRIP) Low Rate Income Pool (LRIP)
• Gross-Up Factor 38% (Multiply cash by 1.38) 15% (Multiply cash by 1.15)

Federal DTC (% of Grossed-Up) 15.0198% ( ≈ 15.02 % \approx 15.02\% ≈ 15.02% ) 9.0301% ( ≈ 9.03 % \approx 9.03\% ≈ 9.03% )

Federal DTC (% of Gross-Up) 6 11 \frac{6}{11} 11 6 ​ of gross-up amount 9 13 \frac{9}{13} 13 9 ​ of gross-up amount

• Effective Personal Tax Significantly lower Moderate (higher than eligible dividends)
• 3. Worked Numeric Example: After-Tax Retention Comparison

To illustrate the power of dividend integration, consider an investor in a Canadian province with an illustrative 50% combined marginal tax bracket (consisting of a 29% federal tax bracket and a 21% provincial tax bracket). The provincial DTC is assumed to be 10.0% of the grossed-up dividend for eligible dividends.

We compare the after-tax cash retained from $1,000 in Interest Income versus $1,000 in Eligible Canadian Dividends .

Step-by-Step Calculation: $1,000 Interest vs. $1,000 Eligible Dividends

• Tax Calculation Step $1,000 Interest Income $1,000 Eligible Canadian Dividend
• Actual Cash Received $1,000.00 $1,000.00
• Gross-Up Rate 0% 38%
• Gross-Up Dollar Amount $0.00 $1,000.00 × 0.38 = $380.00
• Taxable Income Reported $1,000.00 $1,380.00
• Federal Gross Tax (29%) $1,000.00 × 0.29 = $290.00 $1,380.00 × 0.29 = $400.20
• Less: Federal DTC (15.02%) -$0.00 -($1,380.00 × 0.1502) = -$207.28
• Net Federal Tax Payable $290.00 $192.92
• Provincial Gross Tax (21%) $1,000.00 × 0.21 = $210.00 $1,380.00 × 0.21 = $289.80
• Less: Provincial DTC (10.0%) -$0.00 -($1,380.00 × 0.1000) = -$138.00
• Net Provincial Tax Payable $210.00 $151.80
• Total Tax Payable $500.00 $192.92 + $151.80 = $344.72
• Net After-Tax Cash Retained $500.00 $1,000.00 - $344.72 = $655.28
• Effective Tax Rate on Cash 50.00% 34.47%
• Analytical Takeaways from the Comparison

Substantial Cash Advantage: The investor retains $655.28 from the eligible dividend compared to only $500.00 from the interest payment—an extra $155.28 , representing a 31.1% increase in spendable after-tax income from identical gross cash flows.

The Gross-Up Impact on Social Benefits (The Clawback Trap): Although the Dividend Tax Credit reduces personal tax, the investor must report the grossed-up amount ($1,380) on Line 12000 of the tax return. This artificially inflates Net Income Before Adjustments (Line 23400) and Net Income (Line 23600) .

Many Canadian income-tested benefits and tax credits—such as the Old Age Security (OAS) pension , the Guaranteed Income Supplement (GIS) , and the Age Credit —are phased out ("clawed back") based on net income.

An individual earning high dividend income may find that the gross-up pushes their net income past the OAS recovery threshold, triggering a 15% OAS clawback that partially erodes the tax advantage of dividends.

4. Taxation of Foreign Investment Income

Many Canadian investors hold shares of foreign corporations, such as United States multinational companies listed on the New York Stock Exchange (NYSE) or NASDAQ, or global exchange-traded funds.

Treatment of Foreign Dividends and Interest

No Dividend Tax Credit: The Canadian dividend integration mechanism applies exclusively to corporations paying Canadian corporate taxes. Foreign corporations pay taxes to their domestic governments, not to Ottawa or Canadian provinces. Consequently, foreign dividends do not qualify for the dividend gross-up or the Dividend Tax Credit .

Full Marginal Taxation: Foreign dividends and foreign interest are 100% taxable at the investor's ordinary marginal rate , identical to domestic interest income.

Foreign Withholding Taxes and the Foreign Tax Credit (FTC)

Under international tax conventions (such as the Canada-United States Income Tax Convention):

Withholding at Source: When a U.S. company pays a dividend to a Canadian resident, the Internal Revenue Service (IRS) imposes a 15% non-resident withholding tax deducted directly from the cash payment (assuming a valid Form W-8BEN is filed).

For example, if a U.S. company declares a $1,000 USD dividend, the Canadian investor receives $850 USD in cash, while $150 USD is remitted directly to the IRS.

The Foreign Tax Credit (Form T2209): To avoid double taxation, the Income Tax Act allows Canadian taxpayers to claim a Foreign Tax Credit (FTC) on their Canadian return.

The investor reports the full gross foreign dividend ($1,000 converted to CAD) as income on Line 12100.

The investor then claims the foreign withholding tax paid ($150 converted to CAD) as a direct credit against Canadian tax payable, provided the foreign tax rate does not exceed the Canadian tax attributable to that income.

Currency Conversion: All foreign income, expenses, and taxes paid must be converted to Canadian dollars using the Bank of Canada exchange rate in effect on the settlement date of the distribution, or an annual average rate if received uniformly throughout the year.

5. Return of Capital (ROC) and Adjusted Cost Base Mechanics

A Return of Capital (ROC) occurs when an investment fund or corporation distributes cash to investors that does not represent corporate earnings or realized investment income, but rather a return of the investor's original invested principal. Tax Impact of Return of Capital (ROC):

• [ Cash Distribution Received (ROC) ]
• │
• ├──> Year 1: Non-Taxable (0% Immediate Personal Tax)
• │
• └──> Impact: Dollar-for-dollar reduction of Adjusted Cost Base (ACB)
• ▼
• [ Lower ACB ]
• │
• └──> Future Disposition: Larger Capital Gain Realized (Tax Deferred)
• Common Issuers of Return of Capital

Real Estate Investment Trusts (REITs): REIT distributions often exceed taxable net income due to non-cash depreciation allowances (Capital Cost Allowance, or CCA) on real estate holdings. This excess cash flow is categorized as ROC.

Closed-End Funds and Some Income Funds: Often use ROC to maintain steady distribution schedules.

Corporate-Class Mutual Funds (T-Series): Specifically engineered for retirees desiring tax-efficient cash flow by distributing fixed monthly percentages structured largely as ROC.

Tax Mechanics of Return of Capital

Immediate Tax Deferral: ROC distributions are completely non-taxable in the calendar year they are received. They are not included in taxable income and generate zero immediate tax liability.

Dollar-for-Dollar ACB Reduction: Under subsection 53(2) of the Income Tax Act , each dollar of ROC received reduces the Adjusted Cost Base (ACB) of the investment.

Conversion to Future Capital Gains: By lowering the ACB, ROC defers taxation until the investment is eventually disposed of. Upon sale, the lower cost base produces a larger capital gain (or a smaller capital loss), effectively transforming what would have been ordinary income into preferentially taxed capital gains (50% inclusion rate).

The Negative ACB Rule: Subsection 40(3)

An investor's Adjusted Cost Base can never remain below zero:

Exam Key Concept (Subsection 40(3) of the Income Tax Act): If cumulative Return of Capital distributions exceed the investor's original cost base, causing the ACB to drop below zero ( A C B < 0 ACB < 0 A CB < 0 ) , the negative amount is deemed to be an immediate realized capital gain in that taxation year. The investor must report 50% of this negative balance as a taxable capital gain, and the investment's ACB is immediately reset to exactly $0.00 .

Worked Example: Tracking ROC and the Negative ACB Rule

An investor acquires 1,000 units of a Canadian commercial property REIT at $10.00 per unit (Total Cost Base = $10,000 ).

Year 1: Receives a $1,200 total distribution: $400 taxable rental income and $800 ROC .

Tax Result: $400 is taxed as ordinary income; $800 ROC is non-taxable.

New ACB: $10,000 - $800 = $9,200 ($9.20/unit).

Year 2 through Year 11: The investor collects $800 of ROC each year for the next 10 years (Total ROC = $800 × 10 = $8,000).

ACB at end of Year 11: $9,200 - $8,000 = $1,200 ($1.20/unit).

Year 12: The REIT distributes $1,500 ROC .

Calculation: $1,200 - $1,500 = -$300.

Tax Result: Because ACB cannot be negative, the -$300 triggers a deemed capital gain of $300 in Year 12. The investor includes $150 (50% inclusion) on their tax return.

New ACB: Reset to $0.00 .

Year 13: The investor sells all 1,000 units for $14.00 per unit ($14,000 net proceeds).

Capital Gain: Proceeds - ACB = $14,000 - $0.00 = $14,000 .

Taxable Capital Gain: 0.50 × $14,000 = $7,000 .