What Are T3 Slips? A Clear Guide for Trust Beneficiaries

Canada Employee Benefits News and Trends - ebs
What Are T3 Slips? A Clear Guide for Trust Beneficiaries

Trust income allocations can seem complicated for Canadian beneficiaries and trustees. However, like other tax slips in Canada, T3 slips serve a simple purpose – to report any income earned in a trust that gets allocated to beneficiaries.

With some key facts about what T3 slips are, who needs to file them, and how to report T3 income properly, you can ensure full compliance with Canada Revenue Agency (CRA) requirements.

What Exactly is a T3 Slip?

A T3 slip, formally known as the Statement of Trust Income Allocations and Designations, reports any income allocated to a beneficiary from a trust. This includes trusts like:

• Mutual fund trusts
• Estates
• Personal family trusts
• Certain business trusts

The four most common types of income shown on a T3 slip are:

• Interest
• Dividends
• Capital gains
• Foreign business income

That said, T3 slips allow beneficiaries to accurately report and pay tax on trust income they receive by providing the details needed for their personal tax return.

Who Needs to File a T3 Slip?

Trusts are required to issue a T3 slip to any beneficiary who receives an allocation of the trust’s income. This applies to most trusts, with a few exceptions:

• If total income is under $500, no T3 slips need to be issued.
• If the income to one beneficiary is under $100, no T3 slip is required for that beneficiary.

Per new CRA rules effective after 2023, even bare trusts with no income tax obligations must file T3 returns and issue slips to beneficiaries.

When Do You Receive a T3 Slip?

T3 slips are issued to report income allocations for the trust’s relevant tax year. This means that as a beneficiary, you can expect to receive a T3 slip within 90 days after the end of the tax year of the trust.

For example:

• A trust with a December 31 year-end must issue T3 slips by March 31.
• One with a June 30 tax year-end has until September 30 to provide T3 slips.

The slip provides details on the types and amounts of income you received from the trust in that tax year. This allows you to report the income accurately on your personal tax return.

Where Should You Report T3 Income on Your Tax Return?

As a beneficiary who receives a T3 slip, you must report the income amounts it lists on your own Canadian personal income tax return.

Each type of income shown on the T3 slip has a specific line on your tax return where it must be entered:

• Interest income goes on Line 121
• Dividends on Line 120
• Capital gains on Schedule 3
• Foreign business income gets reported as self-employment income on Form T2125

Reporting the T3 amounts properly ensures you pay tax on any trust income received at the right rate. It also avoids issues or penalties for misreporting income in a lower tax bracket.

Why Did I Get a T3 With No Income Received?

Sometimes, T3 slips can be puzzling, especially when they show the income you never directly received. This often happens with mutual fund trusts.

The reason is that mutual fund trusts must allocate their income earned to investors according to the number of shares they hold. Even if distributions are reinvested, the income itself is still taxable.

For example, say a mutual fund earned $100,000 of interest and capital gains in 2022. An investor who owned 5% of the fund on distribution day would receive a T3 for 2022, reporting $5,000 of income, even if they chose to reinvest the distribution.

So don’t be alarmed if your T3 shows income you didn’t actually collect. It’s simply your share of what the trust itself earned that year.

How Is a T3 Slip Different from a T4, T4A or T5 Slip?

T3 slips serve a distinct purpose from other common Canadian tax slips like the T4, T4A, and T5:

Let’s see how the table below summarizes the key differences:

Tax Slip	Issuer	Income Type	Recipient
T3	Trusts	Allocated trust income like capital gains, interest, and foreign business income	Trust beneficiaries
T4	Employers	Employment income like salary and benefits	Employees
T4A	Pension funds, scholarships, etc.	Pensions, annuities, RESPs, other	Pensioners, students
T5	Banks, investment firms	Interest, dividends, royalties	Investors

So, while they all report income, each slip has unique purposes for specific taxpayer situations.

How Should a Trust File Its T3 Return and Slips?

When a trust reaches its tax filing deadline, filing a complete T3 return along with T3 slips for beneficiaries involves key steps:

1. Determine total income and allocations: Collect all income and distribution details to calculate totals for the T3 return.
2. Prepare T3 slips for each beneficiary: Include their name, SIN, income type, and amounts allocated.
3. File T3 return and slips with CRA: File by mail or electronically through My Trust Account within 90 days of year-end.
4. Distribute T3 slips to beneficiaries: Ensure each receives their individual T3 slip by the deadline.
5. Correct any errors: File an amended return and redistribute slips if any mistakes are found.

Meeting the filing deadline avoids potential penalties from the CRA and ensures beneficiaries have their T3 slips in time to file their personal tax returns accurately.

Reporting T3 Income on Your Personal Tax Return

With your T3 slip in hand, how do you properly report the amounts in your own tax return to the Canada Revenue Agency?

Where to Report Each Type of T3 Income

The T3 slip contains boxes with specific income types and amounts allocated to you as the beneficiary. Each amount must get transcribed carefully onto the corresponding line or schedule when you file your own personal tax return.

T3 Slip Box	Income Type	Where to Report on Personal Return
Box 13	Interest income	Enter on Line 121 as regular interest income
Box 14	Dividend income	Report on Line 120 as taxable dividends
Box 15	Capital gains	Enter taxable amount on Schedule 3
Box 16	Foreign business income	Report as self-employment income on Form T2125

Failure to properly transcribe T3 amounts risks audits or reassessments for incorrectly reporting income.

Adjusting Marginal Tax Brackets

In addition to reporting T3 income accurately, you must consider how the additional income affects your total income and marginal tax bracket for the year.

Even small amounts of additional interest or dividends could push your income into a higher bracket. Ensuring the proper marginal rate applies to each type of T3 income is critical.

Implications for Tax Credits and Deductions

With the extra income from a T3 slip, also consider how eligibility for certain credits or deductions may change.

For example, adding the T3 income could:

• Reduce your Canada Child Benefit if total family income exceeds thresholds
• Decrease your Age Credit claim if net income is now too high
• Limit the ability to claim the spouse credit based on new total income amounts

To avoid reassessments, ensure all calculations reflect the T3 amounts where applicable. Thoroughly review which income-tested credits and deductions may be affected.

Deadlines to Report T3 Income

You should integrate T3 amounts when filing your personal tax return for the year. Common deadlines for personal returns are:

• April 30 for most individuals
• June 15 if self-employed
• December 31 at the latest if the spouse or partner is self-employed

File by the deadline to avoid late filing penalties. The standard CRA penalty is 5% of any unpaid tax owing, plus 1% compounding each month the return is late.

What Penalties Apply for Late or Incorrect T3 Filing?

To encourage full compliance, CRA applies penalties for late filing or mistakes on T3 returns:

• Late filing penalty: This applies if a T3 return with amounts owing is filed past the deadline. Depending on the number of days late and the amounts owing, the penalty can range from $100 to $7,500.
• $25 daily late filing fee: Even with no taxes owing, a penalty of $25 per day (minimum $100) applies for T3 returns filed after the deadline.
• Incorrect reporting penalties: If errors in income allocations or deductions are found, penalties ranging from 20% to 100% of the incorrect amount may apply, depending on the severity.

Key Takeaways on T3 Slips

Here’s a quick summary of the most important things to know about T3 slips.

• T3 slips report any income from a trust allocated to beneficiaries for tax purposes.
• Almost all trusts must issue T3 slips to beneficiaries within 90 days after year-end.
• As a beneficiary, report T3 income on the appropriate lines and schedules when filing your personal tax return.
• Review T3 slips carefully and include the income reported, even if you didn’t directly receive an actual distribution.
• Late filing and mistakes on T3 returns can lead to significant financial penalties from CRA.

Understanding the purpose of T3 slips takes the confusion out of reporting trust income. With some guidance on where and how to report T3 amounts, both trustees and beneficiaries can file accurately and avoid issues with CRA. At the end of the day, proper trust income reporting means more dollars in your pocket and less stress at tax time.

FAQs

Article Sources

• A Guide to the T3 Trust Return in Canada – turbotax.intuit.ca
• Why Did I Get a T3 Tax Slip for Income I Didn’t Receive? – zlc.net
• What is the Difference Between T3, T4, T4A and T5 Slips? – ledgerlogic.ca
• T3 Statement of Trust Income Allocations and Designations – canada.ca

What Are T3 Slips? A Clear Guide for Trust Beneficiaries
Ben Nguyen