What is a T3 form?

Question: By now, you've probably received all your tax slips in order to complete your tax return. If you invest in a non-registered segregated or mutual fund plan, one of those slips will be the T3 supplementary tax slip. Its arrival often prompts people to ask what the amounts reported on their T3 mean. "I haven't sold any units, so why did I receive a T3 slip? OR The value of my fund has declined, so why is there income or a capital gain reported on my T3?"

Answer: In order to answer these questions, it is important to understand that income can be attributed in two ways. The first is through gains (losses) and income earned by the fund itself, as a result of the fund managers' trading profits, as well as through dividends and interest received on the investments. The second source is through gains (losses) incurred when the individual investor redeems fund units at a profit or loss.

For tax purposes, most investment funds are set up as trusts. This means that income earned by the fund itself, is flowed through to the unit holders. If the income remained in the fund, the fund would pay the tax at the top marginal tax rate. By distributing the income to the investors, the investors pay the tax at a potentially lower tax rate. These flow-through entities distribute income to unit holders in the form of interest from Canadian sources, dividends originating from Canadian common or preferred shares, capital gains and foreign income from either stocks or bonds. Unless the investments are held within an registered retirement savings plan, income received on the investment funds is reported on your T3 tax slip and must be declared on your tax return.

These various sources of income have different tax implications, so the type of income is itemized separately on the T3 slip for easier reporting. Let's consider the various types of investment income and how they are taxed.

Interest Income: Interest income is fully taxable as if it were regular income. You are taxed on interest income at the marginal tax rate (rate paid on the last dollar earned). This type of income is not eligible for any preferential tax treatment.

Dividends: Dividend income receives a dividend tax credit. The dividend is grossed up by 25 per cent then reduced by an offsetting dividend tax credit and is generally the least taxed form of income.

Capital Gains: Only 50 per cent of the total realized capital gains is included in your income for tax purposes.

Foreign Income: Foreign interest and dividends are fully taxable in Canada and are not eligible for dividend tax credits. However, a foreign tax credit could be issued if foreign tax was withheld from any income received by the fund.

If you have any further questions, feel free to contact me.

This information is general in nature, and is intended for educational purposes only. For specific situations you should consult the appropriate legal, accounting or tax expert.