Trial Balance does not include amount of Return of Capital Investment splits

[John Ralls]

> On May 15, 2017, at 8:42 PM, John Ralls <jralls at ceridwen.fremont.ca.us> wrote:
> 
>> 
>> On May 15, 2017, at 7:41 PM, Chris Good <chris.good at ozemail.com.au> wrote:
>> 
>> Hi,
>> 
>> 
>> 
>> I'm airing this before I raise a bug.
>> 
>> 
>> 
>> I've noticed that if you do a Return of Capital transaction [1]
>> 
>> I.e. Stock split with Shares=0, Price=0, Sell=Return of Capital value,
>> 
>> the Trial Balance no longer balances by the value of the Return of Capital.
>> 
>> 
>> 
>> The stock line value in the report does not include the Sell value of the
>> RoT split.
>> 
>> 
>> 
>> Can anyone throw any light on this?
>> 
>> 
>> 
>> The Balance sheet also shows the incorrect asset value of the stock, but it
>> still balances
>> 
>> because it (incorrectly?) also shows Unrealised Gains in Equity with the
>> value of the RoT.
>> 
>> 
>> 
>> [1] https://www.gnucash.org/docs/v2.6/C/gnucash-guide/invest-retofcap.html
>> 
>> 
>> 
>> Regards, Chris Good
> 
> A return of capital when booked that way creates an unrealized capital gain: You have the same number of shares but a lower basis. You can either recognize the capital gain or find a different way to record the RoC.

It occurred to me that I should explain that a bit more fully.

The original buy transaction sets the basis, and any transaction that changes the balance of money<->shares will affect the trial balance, so you need another pair of splits that adjusts Equity to compensate, just as you do when you sell a security.

Under US tax law (the only flavor I know anything about) RoC reduces the basis so that taxes on it are deferred until one sells the asset
and furthermore are at the (much lower) capital gains rate. There may be other benefits as well depending on the industry the company is in; those companies generally issue special tax documents (called "K-1s" in the US) that are a serious PITA to deal with. Most of the tax advantages other than the deferment are useful only to people in high tax brackets, so that sort of investment generally makes sense only to that sort of investor and makes no sense at all (except maybe diversification) in tax-deferred accounts like retirement accounts. The rules are likely different in other jurisdictions, so investors should study up and seriously consider consulting an accountant before investing.

Anyway, if your jurisdiction allows you to reduce the basis of the investment instead of immediately recognizing the income then you'll want to set up a non-taxable income hierarchy with a "returned capital" account in which to recognize the income and to get your trial balance to balance. You'd otherwise treat it like any other capital gain/loss.
If your jurisdiction doesn't allow you to defer recognizing the income by reducing the basis then an RoC is just a dividend with a funny name and you should book it accordingly.

Regards,
John Ralls