WHY DID I GET A T3 TAX SLIP FOR INCOME I DIDN’T RECEIVE?
If you are like most investors, this can be confusing.
Whether you receive a cash distribution from your mutual fund, or leave it invested within your mutual fund, the investments held within in your fund’s portfolio may have still generated taxable income during the year.
Depending on how your mutual fund is invested, the income generated can be:
Capital gains, from when the portfolio manager makes changes within your fund’s portfolio, and sells securities that result in a profit. Only 50% of the capital gain is included in income. Capital losses are not reported, but do offset capital gains within the fund.
Dividends, from companies that distribute part of their earnings, results in a taxable amount that is first ‘grossed up” to produce a taxable income total, then the tax is reduced by a dividend tax credit. (This rather complicated calculation is designed to reflect that the corporation has already paid tax on its profits.)
Interest, from government or corporate bonds, results in income that is fully taxable.
Return of Capital, from income trusts and systematic fund withdrawals, are considered a return of your capital, and are not immediately taxable. However, Return of Capital reduces the cost of your investment for tax purposes, which then results in a higher capital gain later, when you eventually sell your investment. (Most mutual fund companies will provide you with the information you need to keep track of your adjusted cost base, to help you calculate your taxable gain when the time comes).
Fund company distributions can be made monthly, quarterly or annually (or not at all) and you will receive a T3 Supplementary slip early each year for your personal tax return preparation.
Distributions are not prorated according to how long you hold your mutual fund, so you need to consider when you purchase the fund, to be sure you are not responsible for tax on the fund’s annual income, if you have only held the fund a short while.
When you sell your mutual fund, you need to calculate your own capital gain or loss, and report it on your personal tax return. A T3 Supplemental slip is not issued, but the fund company will provide you with the information you need to complete the required tax schedule. This is often provided with your year end statement.
If your mutual funds are held in a Registered Retirement Savings Plan or Registered Retirement Income Fund, distributions, capital gains and/or losses have no immediate tax consequences. All withdrawals from these plans are full taxable.
Segregated funds, issued by insurance companies, are similar to mutual funds in their investment structure, but they have some key differences in their tax reporting:
Income earned within your segregated fund portfolio increases the value of your investment. Your income distribution is reported on a T3 Supplemental slip, but unlike mutual funds, you do not receive additional units equal to the value of the distribution.
Capital losses, from when the portfolio manager makes changes within your fund’s portfolio, and sells securities that result in a loss, are reported on a T3 Supplemental slip so that 50% of any capital losses can be used to offset 50% of other capital gains.
When you sell your segregated fund, you do not have to calculate your capital gain or loss. The insurance company will do this for you and report it on a T3 Supplemental slip.
