Sarah invests $10,000 into a mutual fund and later sells all her units for $12,500. During her holding period, she received $500 in return of capital (ROC) distributions. What is Sarah's capital gain for tax purposes?

Question: Sarah invests $10,000 into a mutual fund and later sells all her units for $12,500. During her holding period, she received $500 in return of capital (ROC) distributions. What is Sarah's capital gain for tax purposes?

Answer options: ✅ $3,000

• $2,500
• $2,000
• $1,500

Correct answer: $3,000

Explanation: Return of capital distributions reduce the investor's Adjusted Cost Base (ACB). Sarah's original ACB was $10,000. After receiving $500 in ROC, her ACB was reduced to $9,500. When she sold for $12,500, her capital gain was $12,500 - $9,500 = $3,000. (IFIC Chapter 6: Taxation of Mutual Funds)