When distributions from a mutual fund are reinvested (rather than taken in cash), they are not taxed again at the time of reinvestment. Instead, they increase the adjusted cost base (ACB) of the investment. This is important because when the investor eventually sells the mutual fund units, the capital gain (or loss) is calculated as:
Capital Gain = Proceeds of Disposition – Adjusted Cost Base – Expenses Incurred to Sell
In Zofia’s case:
Original investment = $10,000
Reinvested distributions = $2,500 (which increases the ACB)
Therefore, ACB = $10,000 + $2,500 = $12,500
Proceeds of sale = $15,000
Capital gain = $15,000 - $12,500 = $2,500
Thus, the correct answer is D, because $12,500 is the adjusted cost base and the capital gain on sale would be $2,500, not $5,000.
This is clearly stated in the Investment Funds in Canada material where it explains that reinvested distributions increase the investor ' s ACB and are not separately taxed at the time of disposition.
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