Schedule 3 for ETF investors: ACB, return of capital and superficial losses

1. Step 1: average cost across all your non-registered accounts

Units of the same ETF are identical properties. CRA’s capital gains guide T4037 says that when you buy identical properties at different times, you calculate the average cost of each property in the group at the time of each purchase to get your ACB, and that selling some of them does not change that average.

The group is yours, not the account’s. If you hold the same ETF at two brokers outside registered plans, the units are pooled: a sale at one broker uses the average cost across both. Each broker’s “book cost” only knows its own purchases, so neither statement shows your ACB.

Purchase commissions are part of the cost. For trades in US dollars, T4037 says to convert using the Bank of Canada exchange rate in effect on the day of the transaction: each purchase at its own day’s rate, the proceeds at the sale day’s rate.

The ACB is defined in s.54 of the Income Tax Act as cost adjusted under s.53. The next two steps are those adjustments.

2. Step 2: return of capital and reinvested distributions

Most Canadian-listed ETFs are mutual fund trusts. Two kinds of distribution change your ACB without any trade on your statement:

• Return of capital (ROC) lowers the ACB. Under s.53(2)(h), amounts paid by a trust on your units that are not taxed as income are deducted from the cost of the units. It appears on the T3 slip in box 42, which T4037 describes as a change in the capital balance of the trust: a positive amount is subtracted from your ACB, a negative amount is added.
• Reinvested (“non-cash” or “phantom”) distributions raise the ACB. Many ETFs distribute capital gains at year-end in new units and then consolidate them, so your unit count does not change. You are taxed on the distribution through the T3 slip; T4037’s example adds reinvested distributions to the cost. Leave them out and you pay tax on the same amount twice.

If ROC takes the ACB below zero, T4037 says the negative amount is deemed to be a capital gain in that year, the ACB becomes zero, and the gain goes on line 13200 of Schedule 3 with zero on line 13199.

Where to find the figures: the T3 slip comes from your broker, but the per-unit breakdown comes from the issuer, which publishes it every year. For example, iShares’ 2025 distribution characteristics (provided to CDS on 11 February 2026) list, per unit and per record date, the cash and reinvested distribution and the box 42 return of capital — for XEQT in 2025, a reinvested distribution of $0.32215 a unit on the 30 December record date and $0.04485 a unit of box 42 over the year. Multiply by the units you held on each record date.

3. Step 3: superficial losses, and where the denied loss goes

A loss is superficial under the definition in s.54 when you, or a person affiliated with you, acquire the same or identical property (the “substituted property”) in the period from 30 days before to 30 days after the sale, and you or that person still own it 30 days after the sale. T4037 lists affiliated persons including:

• you and your spouse or common-law partner;
• you and a corporation controlled by you or your spouse or common-law partner;
• a trust and its majority-interest beneficiary.

A superficial loss cannot be deducted that year. Under s.53(1)(f) it is added to the ACB of the substituted property, so it comes back as a smaller gain or larger loss when that property is sold. When only part of what you sold is bought back, only that part of the loss is denied.

Where it goes depends on who bought. If you bought back in your own non-registered account, the denied loss raises your own ACB. If your spouse bought, it follows their units. If the buyer was your TFSA or RRSP — a trust of which you are the beneficiary — the addition is to units inside the plan, where the cost never enters a tax calculation, so in practice the loss is lost. That last conclusion is our reading of s.54 and s.53(1)(f) together; T4037 does not name registered plans.

T4037 also lists situations where the rule does not apply, such as becoming or ceasing to be a Canadian resident and deemed dispositions on death.

4. A worked example

Illustrative figures only: “Fund X”, its prices, its per-unit distributions and the exchange rates are made up to show the method.

Alex, resident in Canada, holds a Canadian-listed ETF at two brokers and a US-listed ETF in a US-dollar account, all non-registered.

Disposition 1: Fund X, at a loss

The loss is $5,600 − $6,294 − $10 = −$704. Within 30 days, 150 identical units were bought and kept: 100 by Alex, 50 by Alex’s TFSA. So 150/200 of the loss is superficial:

Without the reinvested distribution the ACB would be $150 lower and the loss smaller; without the ROC it would be $25 higher. Without the 30-day check, Alex would claim $528 that cannot be deducted.

Disposition 2: a US-listed ETF, at a gain

5. Step 4: what Schedule 3 asks for

The 2025 Schedule 3 (5000-S3), Part 3, has a section headed Publicly traded shares, mutual fund units, deferral of eligible small business corporation shares, and other shares. Each line has the name of the fund or corporation and five columns, named as the form names them:

The section’s totals go on line 13199 (total proceeds of disposition, $23,540.00) and line 13200 (total gain or loss, $5,257.10). Two notes:

• Column (5) is labelled “col. 2 minus col. 3 and 4”, which for Fund X gives (704.00); only (176.00) is deductible. How the denied $528 is shown (for example, as a separate adjustment) depends on your software or preparer; the parts of the CRA guide we read do not prescribe a layout. What matters is that the deductible loss is $176.
• For units bought over several years, column (1) asks for a year; the pool spans 2023–2024. Check what your software expects.

Capital gains distributed by funds and shown on your T3 slips are not dispositions: Part 4 has its own line 17600, “Capital gains or losses from your T3 slips”. Part 4 adds everything up to line 19700, and Part 5 takes it to line 19900.

6. Step 5: the inclusion rate

Only part of a capital gain is taxed. Section 38(a) of the Income Tax Act makes a taxable capital gain one half of the gain, and s.38(b) makes an allowable capital loss one half of the loss. T4037 states that the inclusion rate for 2025 is 50%, and Part 5 of the 2025 Schedule 3 multiplies line 22 by 50%.

Alex’s $5,257.10 of net gains becomes a taxable capital gain of $2,628.55, plus half of any T3 slip capital gains. If positive, the schedule says to enter it on line 12700 of the return. A net capital loss is not entered there; the schedule says it can be carried forward indefinitely, or carried back to the three previous years on Form T1A.

7. How Borderfolio helps

With Canada set as your tax residence, the tax page of the investor app has a card called Dispositions for Schedule 3. It is built from the confirmed transactions you imported from your broker statements, in your own and joint accounts (accounts whose owner is set to a child or someone else are left out):

• Every sale in your non-registered accounts for the calendar year, with units, the year or years of acquisition, proceeds, ACB, outlays and expenses, and the gain or loss.
• ACB averaged across all your non-registered accounts, each trade converted at its own date’s exchange rate.
• Return of capital and reinvested distributions applied per record date from the issuers’ published tax breakdowns, for the Canadian ETFs in our catalogue. A Canadian fund sold without a breakdown on file is named, and a fund whose ROC took the ACB below zero is named too.
• Superficial losses checked 30 days either side, counting purchases in your RRSP, RRIF, TFSA or FHSA and in any account you track whose owner is set to your partner. Each denied loss shows how much was added to your ACB and how much follows units bought by your partner or in your registered plan.
• The year’s totals: net capital gain, the taxable part (or allowable loss) at the inclusion rate, proceeds of disposition and losses denied.
• A CSV with one line per disposition and a totals line.

Free shows the totals; the list of dispositions and the CSV are part of Pro ($15 a month or $149 a year). It lists what Schedule 3 asks for. It does not fill in or file the form.

What it does not cover, as the card says:

• Dispositions in registered plans are left out.
• Units bought before your imported history have no ACB here and are listed as unknown; totals are then left empty rather than guessed.
• Corporate actions not on file (mergers, spin-offs, share exchanges) are not reflected; splits on file are.
• Return of capital and reinvested distributions come only from the catalogued Canadian ETFs; other funds’ T3 adjustments are not included.
• A return of capital that takes the ACB below zero is named, not listed as a disposition.
• Gains on foreign currency itself, such as cash held in US dollars, are not computed. T3 slip capital gains (line 17600) are not part of the list.
• The year of acquisition is the range of purchase dates in the pool.
• Joint accounts are listed in full; your share of a joint disposition is not split out.

The Canadian checks on the same page also cover Form T1135, from the same ACB.

FAQ

Is my broker’s book cost the same as my ACB?

Often not. Book cost on a statement usually reflects what you paid in that account. Your ACB averages identical units across all your non-registered accounts, adds reinvested distributions, subtracts return of capital reported in T3 box 42, and adds any superficial loss denied on an earlier sale.

Does buying the same ETF in my TFSA make a loss superficial?

It can. T4037 lists a trust and its majority-interest beneficiary among affiliated persons, and a purchase by an affiliated person within 30 days before or after the sale, still held 30 days after, makes the loss superficial. The Act adds the denied loss to the cost of the substituted property of whoever bought it; inside a TFSA or RRSP that cost never enters a tax calculation, so in practice the loss is gone. That last step is a reading of the provisions, not a sentence CRA’s guide states.

What happens if return of capital takes my ACB below zero?

T4037 says the negative amount is deemed to be a capital gain in that year, the ACB is then deemed to be zero, and you report the gain on line 13200 of Schedule 3 with zero on line 13199.

Does Borderfolio fill in Schedule 3?

No. It lists the dispositions in your non-registered accounts for a year, at the ACB averaged across them with issuer return of capital and superficial losses applied, and the taxable part at the inclusion rate. You enter the figures yourself or give the list and CSV to your preparer. It is an estimate from your own data, not tax advice.