Understanding T5013 Box 113: Guide to Return of Capital and ACB Adjustments in Canada

Introduction to the T5013 Slip

The T5013 slip, also known as the “Statement of Partnership Income,” is a form issued in Canada to individuals who are partners in a partnership. This form is crucial for reporting income, deductions, and other important tax-related information. Issued by partnerships, the T5013 is designed to reflect each partner’s share of the income, losses, capital gains, and other relevant financial information.

One of the most misunderstood components on this form is Box 113, which relates to “Return of Capital.” This article aims to provide an in-depth analysis of Box 113, covering everything from its definition to its implications for tax reporting and personal investments.

What is Box 113 on the T5013?

Box 113 on the T5013 slip represents the Return of Capital (RoC) from a partnership to an investor. Unlike income, which is taxable, a return of capital is essentially a portion of your original investment being returned to you. It does not count as income and, therefore, is not immediately taxable.

However, the significance of Box 113 lies in its impact on the Adjusted Cost Base (ACB) of your partnership units or shares. Ignoring this could result in incorrect capital gains calculations, potentially causing trouble with the Canada Revenue Agency (CRA).

Why Box 113 Matters: The Role of Return of Capital

Return of Capital is a tax-deferred event. While it may seem like free money since it is not taxable upon receipt, the reality is that RoC lowers the ACB of your investment. The lower your ACB, the higher your capital gain will be when you eventually dispose of the asset.

For investors in limited partnerships, this is particularly important because they might receive consistent RoC over multiple years, dramatically reducing the ACB and setting the stage for a large capital gain event down the line.

Is Box 113 Taxable? Clarifying Misconceptions

A common misconception among Canadian taxpayers is that Box 113 amounts need to be reported as income. This is incorrect. Box 113 is not taxable in the year it is received. Instead, its impact is felt over time through changes in your ACB.

Failure to properly account for Box 113 can lead to:

• Overreporting income
• Underreporting capital gains
• Potential CRA audits or reassessments

How Box 113 Affects Adjusted Cost Base (ACB)

The Adjusted Cost Base (ACB) represents the cost of acquiring an investment, adjusted for various factors like reinvested distributions and returns of capital. When you receive a return of capital, the ACB must be reduced by the same amount.

For example:

• Original investment: $10,000
• Box 113 Return of Capital this year: $500
• New ACB = $10,000 – $500 = $9,500

This reduced ACB will be used to calculate your capital gain or loss when the asset is sold.

Step-by-Step Guide: Adjusting ACB Using Box 113

1. Locate Your Original Investment Amount: This is the price you paid for your partnership interest.
2. Review All Box 113 Amounts: Collect all past T5013 slips and sum the Box 113 values.
3. Subtract Box 113 Total from Original Investment: This gives your current ACB.
4. Update Records: Maintain a clear record of your ACB, preferably in a spreadsheet.
5. Prepare for Capital Gains: Understand that a lower ACB means higher gains when you sell the partnership units.

Consequences of a Negative ACB

A critical rule enforced by the CRA is that your ACB cannot fall below zero. If the Return of Capital exceeds your original investment:

• Your ACB is reduced to zero
• The excess RoC is considered a capital gain and must be reported in the year it is received

This situation can catch taxpayers off guard if they fail to track their ACB correctly.

Practical Examples of Box 113 Adjustments

Example 1: Single Year Adjustment

• Investment: $20,000
• Box 113 (RoC): $2,000
• New ACB: $18,000

Example 2: Multi-Year Adjustment

• Investment: $15,000
• Year 1 RoC: $1,000
• Year 2 RoC: $2,500
• Year 3 RoC: $1,500
• Total RoC: $5,000
• New ACB: $15,000 – $5,000 = $10,000

T5013 Box 113 and Capital Gains: When and How They Apply

Capital gains are triggered when an investment is sold. If you’ve received RoC over the years and it’s reduced your ACB, then your capital gain will be: Proceeds of Disposition – ACB – Selling Costs = Capital Gain

If your ACB is significantly reduced by Box 113, the capital gain will be larger. Remember, capital gains are taxable at 50% in Canada.

Reporting Requirements and CRA Guidelines

While Box 113 doesn’t need to be reported as income, you must track the changes to your ACB. CRA guidelines require accurate capital gain calculations, which hinge on the correct ACB.

CRA Publication T4037 (Capital Gains) and Guide T4068 (Partnership Information Return) offer further clarification on how to treat these amounts.

Best Practices for Recordkeeping

• Maintain a detailed spreadsheet with:
  • Original investment amount
  • Each year’s Box 113 value
  • Adjusted ACB calculations
• Save all T5013 slips and brokerage statements
• Consult with your accountant annually to review ACB calculations

Common Errors with Box 113 and How to Avoid Them

• Mistaking RoC as income: Leads to overpayment of taxes
• Not adjusting ACB: Results in underreported capital gains
• Losing historical T5013 slips: Makes it difficult to reconstruct ACB
• Ignoring ACB dropping below zero: Causes unexpected tax liability

When to Consult a Tax Professional

If you:

• Are unsure about your ACB
• Have multiple years of Box 113 values
• May have a negative ACB
• Are planning to sell your partnership units

…then it’s time to contact a tax professional like BOMCAS Canada to ensure compliance and optimal tax reporting.

Implications for Investors and Limited Partners

Understanding Box 113 is vital for anyone investing in:

• Limited Partnerships (LPs)
• Mutual funds with RoC distributions
• Real Estate Investment Trusts (REITs)

Improper treatment can lead to audit exposure and costly reassessments. For accurate guidance, partner with tax experts who understand the nuances of partnership reporting.

Conclusion: Key Takeaways for Canadian Taxpayers

• Box 113 represents Return of Capital, not income
• It is not taxable but impacts your ACB
• Accurate ACB tracking is essential for proper capital gains calculation
• Improper handling of Box 113 can result in audits or extra taxes

If you’re unsure how to deal with T5013 Box 113 or want peace of mind, contact BOMCAS Canada at 780-667-5250 or email info@bomcas.ca. We’re here to help you manage your taxes correctly and efficiently.

FAQ

Q: Is Box 113 on the T5013 taxable?
A: No, it’s a Return of Capital and not taxable. However, it reduces your ACB.

Q: What happens if my ACB becomes negative?
A: The negative amount is treated as a capital gain and must be reported.

Q: How should I track ACB changes due to Box 113?
A: Use a spreadsheet or accounting software to update your ACB annually.

Q: Should I report Box 113 on my tax return?
A: Not directly as income, but it affects your future capital gains reporting.

Q: Can BOMCAS Canada help with this?
A: Yes! Contact BOMCAS for accurate tax advice and ACB tracking.