Retirement Resource Centre - Roc Solid - Unlocking cash flow with return of capital - RBC Global Asset Management

Roc Solid

Unlocking cash flow with return of capital


Many individuals rely on their investments to deliver steady cash flow to support their retirement or other income needs. However, amid a historically low interest-rate environment, this can be challenging. Fortunately, by investing in solutions that include return of capital (ROC), creating a reliable stream of cash flow doesn’t have to be complicated.

What is ROC?

Stocks and bonds generate cash flows in different ways. Stocks may pay dividends and, as they appreciate, they also generate capital gains that are realized when you sell them. Bonds can also generate capital gains and are a good source of interest income. When buying these securities through a mutual fund, you would receive a mixture of interest income, dividends and capital gains. These cash flows may fluctuate month over month or fall short of the cash flow you’re seeking. But certain mutual funds include ROC as part of their monthly payout to unitholders, allowing for a more predictable, tax-efficient stream of cash flow.

Tax-effective cash flow

ROC is a tax term used to describe distributions paid to unitholders that are in excess of a fund’s earnings (i.e., interest income, dividends and capital gains). For tax purposes, ROC represents a return to investors of a portion of their own invested capital in the form of a non-taxable distribution. However, these distributions also lower investors’ adjusted cost base (ACB), which may increase capital gains or reduce capital losses when they eventually sell their units. ​​​​​

This video offers a clear explanation of ROC and demonstrates its benefits for investors

Video recap

Here are the main benefits of ROC:

  • Cash flow stability: Funds that distribute ROC are appealing for investors seeking regular cash flow from their portfolios.
  • Tax efficiency: Unlike interest, dividends and capital gains, ROC is not taxable in the year it is received.
  • Tax deferral: Any capital gains on amounts distributed as ROC can be deferred until the investment is sold, maximizing current cash flow and providing added control over when a client has to pay tax.

For more information on return of capital and adjusted cost base, please contact your advisor.

This information has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. The information contained herein is from sources believed to be reliable, but accuracy cannot be guaranteed. Please consult your advisor and read the prospectus or Fund Facts document before investing. There may be commissions, trailing commissions, management fees and expenses associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. RBC Funds, BlueBay Funds and PH&N Funds are offered by RBC Global Asset Management Inc. and distributed through authorized dealers.

® / ™ Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc. 2017

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