My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Thursday, April 21, 2011

Confessions of a Tax Accountant- Week 8-T5013 ACB & Medical expenses

Today, I will discuss an income tax issue that arose during this week, make a recommendation on a very good medical expense article, discuss a dysfunctional income tax filing situation amongst spouses or common-law partners and put forth an interesting point made by a reader.

The Cracker Jack T5013 Surprise

Many clients purchase flow-through limited partnerships each year. See my blog Are you a flow-through junkie? for more details.

These partnerships are one of the last standing tax shelters condoned by the Canada Revenue Agency ("CRA"). This week a few clients received an unpleasant surprise. The surprise at the bottom of the box (box 70 of the T5013 slip) was a capital gain and not a toy surprise.

As background, in 2009, these clients purchased a flow-through limited partnership for $25,000 a unit. For each unit, they received approximately $25,000 in oil and gas exploration income tax deductions last year. Thus, they saved approximately $11,500 in income tax at the high rate in 2009, making their out of pocket cost per unit around $13,500. The adjusted cost base of each unit was also ground down to zero.

Back to the surprise...my clients were less than pleased to note their 2010 T5013 for their 2009 flow-through partnership reflected a capital gain of approximately $15,000 per unit. As consequence, they now have to pay income tax on a $15,000 gain per unit, for which they have not received any proceeds. This 2010 taxation allocation is sort of ironic, as most flow-through investments are bought, at least partly, for an income tax deferral and these clients are being forced to pay income tax upfront on monies they have not received.

Ignoring the income tax cash flow issues, these capital gains are actually indicative that many of the 2009 flow-through funds have increased in value from the original purchase price, as many of these funds were purchased when oil was in the $40 to $50 range. Although counter intuitive for a tax shelter, this is actually a good thing, buying a fund and having it increase in value.

These capital gains arise because the partnership investment managers actually sold the underlying stocks within the flow-through partnership (due to the robust market for resources in 2010) and these realized gains are allocated to each limited partnership partner. This is very similar to the mutual fund issue where holders are allocated capital gains each year, but not the cash to pay the tax on these gains.

The moral of the story is simple; most investors in flow-through investments are sold by their advisors on the tax deferral\savings and the downside protection afforded by these investments, but they do not take the time to understand exactly what they purchased or more accurately, their advisors do not take the time to explain what they have sold in many cases. This is not to say I don’t think there is a place for these type investments, just that many people do not fully understand the income tax implications.

The Cracker Jack box does contain one more surprise, that being the capital gain that must be reported actually increases the cost base of the flow-through back to $15,000 from nil (i.e.: original cost is $25,000, which is reduced to nil by claiming $25,000 in resource deductions in 2009, but the $15,000 capital gain allocation then is added back to the cost base).

Medical Expenses

I was quoted last week in an excellent article by Larry MacDonald entitled Medical expenses can pay off at tax time. Notwithstanding the fact I was quoted, I think this is an excellent article on medical expenses and should be read, especially if you or someone you know, incurs costs caring for a disabled person. In addition, Dianne Nice this week also had an informative article on tax programs for the disabled.

Spouses or Common-law Partners Using Different Accountants

We have a few clients for whom we prepare one spouse or common-law partner’s income tax return and the other spouse or partner uses another accountant. I don’t usually ask the client for the reason why we are preparing only one spouses return; however, I assume it is because they wish to keep their finances separate, have secrecy issues or each person may just really like their accountant.

If you are one of these people, I would suggest this is dysfunctional from an income tax perspective, and  you should reconsider using the same accountant. If secrecy is the issue, you can institute a Chinese wall of secrecy so that there is no passing of information between spouses or partners.

Where spouses or partners use different accountants, they may not maximize medical and donation credits, they may incorrectly file child care claims and may miss a multitude of child related credits or worse yet, may claim them twice. Just as importantly, family income tax planning is neglected.

In conclusion, if you use a separate accountant then your spouse or partner, you should reconsider this practice for the reasons noted above.

Readers Point

A reader sent me an email this week asking "why does the CRA not issue T5s for interest income?". That is an interesting question. Many people get those little notes on their notice of assessments or reassessments that "your refund includes refund interest of $x. Since this interest is taxable in the year your receive it, you must include it as income on your 2010 tax return." Who the heck ever remembers to include this unless your accountant picks it up? It would sure make more sense for the CRA to issue a T5.

[Bloggers Note: In my Confessions of a Tax Accountant blogs, I will discuss real income tax issues that arise, but embellish or slightly change facts to protect the innocent, as the saying goes.]

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

4 comments:

  1. Your recent blog series on cottage inheritance has me thinking about a related issue: what is the inheritance status of TFSA accounts?

    For example, let's say that a person has a personal TFSA that is fully used. Then, they inherit a TFSA account from somebody else. Does the account continue to be tax free? Is the inheritor required to sell the assets? How does it work?

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  2. Hey Tom:

    Here is a link to a nice summary by Megan Connolly an estate lawyer.

    http://www.torontoestatemonitor.com/estate-planning/death-of-a-tfsa-holder---how-to-avoid-the-taxes/

    Long and short of it is unless your spouse is the successor (in which case exempt status is maintained and the inherited TFSA does not affect your spouses TFSA limit) the TFSAs exempt status ends and it must be paid out, I think within a year of death. The TFSA value at death is inherited tax free, however any earnings from death until paid out will be taxable.

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  3. I read the medical expense article you suggested. I have heard about this new blood cord program for new babies. Would this qualify as a medical credit?

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  4. Anon- I did a very very fast fast check and I did not see anything from the CRA on the topic. I found a document (see below) from a benefits company that reflects it as ineligible, but I am not sure if that is as medical expense or insurable expense. However, they seem to be one and the same in most cases. See page 3 ineligible. You can always call CRA, they may have ruled on it already.

    http://www.olympiabenefits.com/pdf/list-of-eligible-expenses.pdf

    ReplyDelete