Canadian Taxation Back to Basics: What is a T3 return?

Often times with all the complexities that come with International taxation we sometimes lose sight of the basic questions that come our way in the taxation industry.

For example, what is a T3?T3

A T3 slip is a Canadian tax form that reports income from trusts for a tax year.

An individual taxpayer will include the amounts reported on the T3 on his personal tax return.

A corporation will include it as part of its investment income.

A trust (or trustee / intermediary / transfer agent, etc.) is required to provide the T3 slip to investors by the last day of February in the following year.

So what again is a T3 slip?

A T3 slip details the various types of income distributed from the trust for a taxation year.

Why would an individual get a T3 slip?

The most common reason is for distributions or dividend reinvestments in mutual funds or segregated funds.  However, if these funds are held in tax-deferred retirement (RRSP) or education accounts (RESP), no T3 will be generated.  The reason no slips is issued in those cases is because the income in those types of funds is reportable for tax purposes once they are withdrawn from the fund.

The trust is responsible for filing copies of all T3 slips along with a T3 Return to Canada Revenue Agency (CRA) by the end of February in the following year.

What kinds of income can trusts distribute?

Trusts can distribute interest, royalties, business income, pension income and most commonly dividends and capital gains.

Each is recorded on a separate line on the T3 slip.  Each type of income is treated differently for tax purposes and appears in a separate location on the taxpayer’s personal income tax return.  Capital gains may be offset by other capital losses in the year or from prior years.

Filing a T3

A T3 is filed as part of a taxpayer’s T1 personal tax return.

When is a T3 required?

Regardless of the fiscal year-end of the trust, the T3 is generated and reported in the year the income is received.

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Form 1042-S

What is a 1042-S?

Form 1042-S, or Foreign Persons US Source Income Subject to Withholding, reports for non-US persons or entities interest payments, dividends and substitute payments in lieu and applicable US source tax withholding, thereon, from US securities paid to foreign investors.

This information is also reported to the IRS.

It is possible to receive multiple 1042-S forms reporting different types of income during a given tax year.

Box 1 contains a code indicating the type of income being reported, shown below:

Code Income Type
6 Dividends
24 Substitute payments in lieu – dividends
01 Interest
29 Deposit (credit balance) interest
30 Original issue discount
33 Substitute payments in lieu – interest
50 Referral fees

Box 2 contains the gross US source income of the type indicated in box 1. Box 5 contains the withholding tax rate applied as determined by statute or applicable US tax treaty.

Box 6 contains an exemption code if the reportable income is exempt from withholding, for example interest and original issue discount.

Box 7 is the total amount of US federal tax withheld.

Withholding, Roth IRA’s and Part XIII

Last week I was approached by a CEO of a very large US Corporation who was questioning the need to have withholding tax taken off his dividend payment, when the funds were earmarked for his Roth IRA.

From pervious communication on this matter I knew there should be no withholding, but I wanted something more concrete to put on my website in order to have for nay future queries and to educate all of you who look for an answer.

So I called the CRA international office and they confirmed that the dividend paid to U.S. holder who registered in Individual Retirement Accounts (“IRAs) are not subject to Part XIII (non-resident withholding) tax.

Also they advised me that there is no specific document regarding IRAs provided on CRA website.

Please see below statement from Canada – U.S income tax convention:

http://www.fin.gc.ca/treaties-conventions/USA_1-eng.asp

ARTICLE 13
3. For the purposes of this Convention:
(a) The term “pensions” includes any payment under a superannuation, pension or other retirement arrangement, Armed Forces retirement pay, war veterans pensions and allowances and amounts paid under a sickness, accident or disability plan, but does not include payments under an income-averaging annuity contract or, except for the purposes of Article XIX (Government Service), any benefit referred to in paragraph 5; and
(b) The term “pensions” also includes a Roth IRA, within the meaning of section 408A of the Internal Revenue Code, or a plan or arrangement created pursuant to legislation enacted by a Contracting State after September 21, 2007 that the competent authorities have agreed is similar thereto. Notwithstanding the provisions of the preceding sentence, from such time that contributions have been made to the Roth IRA or similar plan or arrangement, by or for the benefit of a resident of the other Contracting State (other than rollover contributions from a Roth IRA or similar plan or arrangement described in the previous sentence that is a pension within the meaning of this subparagraph), to the extent of accretions from such time, such Roth IRA or similar plan or arrangement shall cease to be considered a pension for purposes of the provisions of this Article.

Now you know!