11 September 2006 Roundtable, 2006-0185621C6 - 2006 STEP Conference -Question 6

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: As of 2004, the T3 slip requires the trustee to show the amount of any adjustments to the ACB of the beneficiary's interest in the trust in Box 42. We are told that some brokers combine the information from various trusts to create one T3 slip. How is a unitholder expected to compute the adjustment for each fund if this is the case?

Position: This question raises two issues, the ability of the information preparer to issue a consolidated T3 slip and the investor's dilemma of computing the capital gain or loss from the disposition of the units correctly, given the interaction of adjustments to the ACB under section 53 (box 42 amounts) and the cost as determined under subsection 248(25.3) of any additional units issued by the trust.

Reasons: See IC92-5 & 93-4 (archived) and attachment for procedure for obtaining approval for a customized T3 slip, including a consolidated T3 Slip. Without approval, a separate T3 slip is required for each Fund. ACB adjustments under 53 include the amounts shown in box 42 for each year in which the units were held as well as any capital distributions received in before 2004. The cost of units acquired as determined under 248(25.3) is not included in box 42 even though it forms part of the cost of the units so acquired.

2006 STEP Round Table
Q6. Consolidated T3 Slips

As of 2004, the T3 slip requires the trustee to show the amount of any adjustments to the ACB of the beneficiary's interest in the trust in Box 42. We are told that some brokers combine the information from various trusts to create one T3 slip. How is a unitholder expected to compute the adjustment for each fund if this is the case?

Response

Effective for 2004, the amount of any return of capital is shown in box 42 of the T3 information slip. A separate T3 slip is required for each fund that provides a return of capital to its investors and has an amount to report in box 42, unless the CRA has authorized the preparer of the information slip to use a customized form that enables the information from several funds to be reported on a consolidated T3 slip. A consolidated T3 slip will only be acceptable if it is accompanied by an information summary that reports the amount shown in box 42 on a fund-by-fund basis for each trust covered by the consolidated slip. An information preparer who wishes to use a customized form should submit a sample customized information slip to the CRA for our approval. The guidelines for making such a request to issue consolidated T3 information slips and the address for obtaining the necessary approval is found in your binder. Note that this information is primarily of interest to investment brokers or mutual fund trust managers who might want to issue consolidated T3 slips to investors. This is because the mutual fund industry had previously identified a need for consolidated T3 slips for administrative reasons, noting that they were already providing the information to their investors on a fund by fund basis in other forms. It is not expected that the trustees of personal trusts would have the same type of administrative difficulties in preparing T3 slips for the multiple trusts which they administer.

If separate T3 slips are not received or a breakdown of the adjustment required for each fund is not provided with the T3 slip, the investor should contact the issuer of the slip for a breakdown of the adjustments required for each fund. CRA documents 2005-0125951E5, 2003-0009837 and 2000-0040053 provide general comments on questions that investors might ask relating to the information slips and related reporting of the information contained on those information slips.

The ACB of a unitholder's holdings in a particular mutual fund trust will be affected by any return of capital as well as by any reinvestment of distributions from the trust. Subsection 248(25.3) of the Act sets out the cost of additional units acquired in satisfaction of a right to enforce payment of an amount by the trust in respect of the unitholder's capital interest in the trust. Chart 1 of the information sheet, RC4169 Tax Treatment of Mutual Funds for Individuals provides an example of how to recalculate the ACB of a unitholder's units in a mutual fund trust in a situation where the unitholder is entitled to a distribution of income and capital but chooses to receive that distribution in the form of more units.

It should be noted that:

• even though the requirement to indicate the amount of any return of capital in box 42 has only been effective since 2004, the amount of any return of capital distributed in years before 2004 also reduces the ACB of the units held;
• the amount shown in box 42 is for the current year but the adjustment required to the ACB of the units is cumulative (that is, the unitholder is required to reduce the ACB of the units by the total of all amounts shown in box 42 for each year in which a T3 slip was issued with an amount shown in box 42 as well as by the amounts of any return of capital distributed before 2004); and
• the cost of the additional units as determined under subsection 248(25.3) of the Act does not form part of the amount included in box 42 of the T3 slip.

Consider the following example. Assume that a unitholder purchased 100 units for $10 each in the year. Assume a unit trust earns $200 in gross revenue in a year, which results in income for tax purposes before the deduction of any amount under subsection 104(6) of the Act of $113. The trust subsequently declared $200 to be payable in favour of the unitholder, $113 out of trust income and $87 out the capital of the trust (i.e., the portion of the gross revenue not recognized for tax purposes). The total $200 amount was satisfied not by cash, but by the issuance of an additional 20 units. In this example, the total ACB of the 120 units following the issuance of the additional units would be calculated as follows:

					  Number 	 Assigned 	Adjustments		ACB
					 of Units 	 cost		in computing											ACB

Initial acquisition of units    100		$1,000				$1,000

Of the total $113 of trust income
made payable, the T3 slip shows
$50 in actual dividends and $63

in other income. The unitholder

includes these amounts in income
as indicated on the back of the
T3 slip

T3 slip also shows $87 in box 42
as a return of capital						($87)			$913

Cost of additional units as
determined under subsection
248(25.3)of the Act 		  20 		$200					$1,113

The result, in this example, is that the total ACB of the capital interest (as represented by the 120 units) at the time immediately after the additional units are issued is $1,113.

GUIDELINES FOR PREPARING A CUSTOMIZED INFORMATION SUMMARY
OF T3 TRUST INCOME

Requirements for filers

Canada Revenue Agency (CRA) will authorize the Information Summary and provide you with an approval number if you meet the filing criteria as specified in this document.

1. Produce an Information Summary annually to your clients.

2. The minimum information necessary for each Information Summary transaction is:

• A single sheet of paper no larger than legal size.
• A table that prominently reports the Box 42 Return of Capital (ROC) amount on a fund-by-fund basis for each trust in respect of which the custom form provides reporting.
• The table must clearly identify each separate fund and set out for each the portion of the amount reported in Box 42 of the standard T3 that pertains to it. The table must allow for the entries to be easily understood as return of capital amounts that collectively total and reconcile with the amount reported in Box 42.
• The CRA word mark must separately appear on the portion of the paper reserved for the table.
• Display T3 in the upper right hand corner of the page.
• The custom table must clearly instruct the recipient to retain all portions of the form for tax reporting purposes. The following must appear at the bottom of the page.

T3 - TRUST INCOME REPORTED IS DISCLOSED YEARLY TO THE CANADA REVENUE AGENCY. YOU MUST RETAIN THIS FORM UNTIL YOU DISPOSE OF THE FUNDS TO CALCULATE THE ACB IN ACCORDANCE WITH THE LAW.

3. The CRA approval number must be clearly printed at the bottom of the Information Summary.

4. Submit a sample client Information Summary Table to the following address for approval:

Information Returns Section
Canada Revenue Agency
E09-8016
750 Heron Rd
Ottawa, On
K1A 0L5

AGENCE DU REVENU DU CANADA
LIGNES DIRECTRICES POUR LA PRÉPARATION D'UN SOMMAIRE D'INFORMATIONS DE REVENUS DES FIDUCIES T3

Exigences de production

L'Agence du revenu du Canada (ARC) autorisera le sommaire d'information et vous remettra un numéro d'approbation si vous rencontrez les critères de production décrits dans ce document.

1. Produire un sommaire d'information annuellement pour vos clients.

2. Les renseignements de base requis pour chaque opération sont les suivants :

• Une seule feuille de papier pas plus grande que le papier grand format.
• Un tableau qui indique clairement le montant de la case 42 (RDC) par fond pour chaque fiducie visée par le formulaire personnalisé.
• Le tableau doit clairement indiquer chaque fond distinct et établir pour chacune de celles-ci la partie qui lui revient du montant déclaré à la case 42 du T3 standard. Les entrées du tableau doivent être clairement représentées en tant que rendement du capital et montants dont la somme équivaut au montant à la case 42.
• Le logo de l'ARC doit apparaître séparément sur la partie de la feuille réservée au tableau.
• T3 doit être inscrit dans le coin droit supérieur de la page.
• Le tableau personnalisé doit clairement indiquer au destinataire de conserver toutes les parties du formulaire aux fins de déclaration d'impôt sur le revenu.

T3- LE SOMMAIRE D'INFORMATION DES REVENUS DES FIDUCIES EST DÉCLARÉ À L'AGENCE DU REVENU DU CANADA ANNUELLEMENT. CONFORMEMENT A LA LOI VOUS DEVEZ CONSERVER CE FORMULAIRE JUSQU'À LA DISPOSITION DES FONDS AFIN DE CALCULER CORRECTEMENT LE PRIX DE BASE RAJUSTE.

3. Le numéro d'approbation de l 'ARC doit être imprimé clairement au bas du sommaire d'information.

4. Vous pouvez soumettre un échantillon du sommaire d'information à l'adresse suivante aux fins d'approbation:

Section des déclarations de renseignements
Agence du revenu du Canada
E09-8016

750, ch. Heron

Ottawa (ON)
K1A 0L5