The presence of a neutral current is quite common in three-phase (3P) four-wire (4W) distribution systems due to an unequal distribution of linear and nonlinear single-phase (1P) loads and small distributed generators. However, a high neutral current can overload the neutral conductor and distribution transformer, which can cause electrical safety concerns and even fire. Among several existing neutral current compensators, the 3P four-leg (4L) voltage-source inverter (VSI) provides better control flexibility and more efficient performance than the passive compensators but requires a higher VSI capacity for the fourth-leg operation. To provide a solution to the aforementioned problem, this paper presents a novel control method to utilize the available capacity of a 3P-4L VSI after active and reactive power regulation to enhance the neutral-current compensation. A smart VSI (SVSI) is designed to operate with a solar photovoltaic unit, regulate the ac side voltage, and minimize the neutral current. Case studies are conducted with actual load data from a commercial building in the PSCAD/EMTDC software environment. The designed system with the proposed control method can provide a significant improvement in the neutral-current compensation, phase balancing, and unbalance factor compared to a fixed-capacity 3P-4L SVSI. Experimental results using a TMS320F28335 digital signal processor microcontroller and modified Semiteach 3P-4L inverter are presented to verify the robustness of the designed controller and the enhancement to the neutral-current compensation using the proposed dynamic capacity-control method.