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Fredericton Daily Gleaner ~ Capital Appreciation ~ Aliant ~ April 9, 2007 - 06 May 2007 by TaxHelp

Seek professional help.
Roger Haineault – “Capital Appreciation” – April 9, 2007.

Many New Brunswickers have found preparing their tax return more confusing than ever this year. Not that there isn’t enough difficulties with the new rules and applying the old rules in new and more beneficial ways, but those who work for the phone company and have participated in the various employee ownership schemes are finding an even greater challenge to come up with the correct calculations to minimize the tax liability.

For those who are not seeking professional help (and I highly suggest that you do, at least this year), you might want to inventory the myriad of slips that have landed in your mailbox. You should have two T4s with roughly the same amount of income on both, since you actually worked for at least two employers in 2006 – Aliant and Bell Aliant (formally Bell Aliant Regional Communications Income Fund) and the break happened roughly at the mid-point of the year. You should also have two T4As representing the amount of the company’s contribution to your purchase of shares in the first part of the year and the trust units in the second. Since Aliant was a corporation, you should also have a T5 that represents dividends and other earnings that you enjoyed up until the changeover. Since Bell Aliant is a trust, you should also have a T3 representing the last part of the year’s earnings. There is a funny anomaly that while most slips have to be out by the end of February, trust slips don’t need to be issued until the end of March, so many of you might now be holding an additional slip that you didn’t have when you filed your return. No, you can’t hang on to it until next year. You must now file an adjustment to include it if you want to avoid any penalty. You also need the quarterly statements from CIBC Mellon that cover this year, and you may also need last year’s reports as well. If you sold shares or units through the plan, you will also have a T5008 slip detailing the disposition. If your shares are held outside of the plan, you may need documentation from your broker. Finally, you have to recognize that your Aliant shares were treated as if they were sold last July 7 for $33.36 and that your Bell Aliant units were bought for $33.36. There is no tax slip to detail this transaction.

Basically, this process is a great clinic for those who want to understand capital gains. Unlike other investments, capital gains are realized only at the time of the disposition of the asset. Bank interest comes routinely, and dividends are usually paid quarterly, but someone who buys a capital asset whether it’s a building or a share hopes that somewhere down the road they will be able to sell it for a profit. As a result, the gain receives favourable treatment – only half of the profit is reported on the tax return, and that is done on the Schedule 3. The question is “How do you determine the profit?” And there’s the rub as Hamlet pointed out, because it is not necessarily what someone receives. Something called the Adjusted Cost Base (ACB) has to be subtracted from the proceeds of disposition and an allowance has to be made for any commissions and other purchase or sale expenses that were undertaken to get to the point of sale.

So how does one calculate the ACB? First, it’s more than the employee remitted through payroll deduction. The employer’s contribution has to be factored in as well, since it’s reported on the T4A and the employee pays tax on this amount. Additionally, the employee plans can allow for profits to be re-invested. As a result the income on the T5 and T3 which the employee also pays tax on may go into the ACB calculation. Finally, any of the outlays and expenses needs to be considered.

If we re-visit last July 7, someone who held 100 shares of Aliant appears to have made a sale for $3,336. But what’s the profit? Did the shares cost $2,336 or $4,336? A mistake here could cost the taxpayer large! As a matter of fact, we reviewed someone’s self-prepared return recently and they had calculated that they owed more than a $1,000. By the time we reworked the numbers, not only was there not a bill – there was a significant refund!

There might be those out there who think that personal tax software can help with this issue. While one can’t discount this possibility, there are also pitfalls with this approach. For instance, the T5008 reports two types of dispositions – indicating the wrong one will incorrectly double the amount of income to report.

This is a year where there are a number of new tax changes that can affect your return. If you held shares in Aliant you need to correctly calculate the business conversion. If you are an employee in addition to an investor, you need to be prepared for a mental workout. So as I said near the top, this might be the year you need to seek professional help. The cost of the service will probably be more than made up for with the savings generated by avoiding the incorrect tax calculation. And if you have already filed and would like us to take a look at it, or file the T3 adjustment, call the office and we’ll help you out.

Roger Haineault is with Help 4 Taxes. He can be reached by email at roger@help4taxes.ca or by calling 443-HELP (4357). His column appears Mondays.