By Miles Clyne
Canadian investors can get reassessments that go something like this: “We have adjusted your return to include income from Fund/investment ABC. We have charged you arrears interest of $XX.XX."
If you have received the above assessment once, the next time it happens you can get something like this: "Every person who fails to report an amount required to be included in income, and who has failed to report such amount on a return (think T3 slip) for any of the three preceding taxation years, is liable to both a federal and a provincial/territorial penalty each equal to 10% of the amount that must be included in income. Accordingly, we have assessed you a federal penalty of $56.70 and a provincial/territorial penalty of $56.70.”
The above wording came directly from a reassessment an investor showed me. What is troubling is that the penalty was $113.40 on $120.00 of tax owing. CRA does not discern between the degree of penalty and the amount of the tax owing. In this case, the penalty represented about 95% of the amount owing. Keep in mind also that the penalties can increase for future infractions as well as the number of infractions. (See link).
You may be thinking; “What’s the big deal? Just report all your T3 income”.
This is where it gets complicated. Investments like mutual funds (and many other investments) don’t have to report T3 income until the end of March, and your personal taxes are due by the end of April. A lot of people try and get their taxes done earlier in the year, especially if they anticipate a refund. Getting your taxes done early creates a bit of a problem when you have to wait on your T3 slips to show up, if they show up. I say IF, because you are at the mercy of the postal service. At T3 reporting time, there could be millions of these slips flooding the postal system. To think that none go astray requires a lot of imagination. The problem is, historically you would have had no idea of what slips you are missing without monitoring closely your investment statements and recording every security that paid income. Consequently, many taxpayers have probably paid penalties in spite of best efforts to be accurate.
For at least several years, CRA has had what is called a “matching” program. If you miss a T3, don’t worry, the government also gets a copy from each investment firm. They post their copy to your file. Consequently, they know immediately when you file your return if you are missing a T3 slip, think “penalty”. The responsibly to report T3 income is still on the taxpayer.
Fortunately, CRA is taking a step in the right direction: CRA is now offering for “My Account registered holders” an auto fill option for tax filers. It will work with validated filing software and auto fill with tax slips that are on CRA's systems. You need to check with the accounting firm you deal with to ensure their system syncs with CRAs. If you do your own taxes and don’t utilize the auto fill option you need to be sure the tax slips you have match the ones CRA have, this is a must do.
A Few Simple Rules To Follow
Confirm your accounting firm’s software syncs with CRAs to ensure accurate matching, and that they file your return after March 31 to ensure they have all T3 slips accounted for. If you do file early, have your accountant check your account at CRA in April and amend your tax return if necessary. If you do your own taxes, be sure you use CRAs auto fill option, or manually match the T3 slips they have to the ones you have.
It’s your money and proper tax planning is an important step in maximizing what you get to keep. Ignorance when it comes to your taxes is not bliss.
Helpful Tips and Links
Effective for the 2015 tax year, all slips on the system can be reviewed online at MyAccount by tax payers. You have to register for this feature, and you will likely need your previous year’s tax return handy for when you register. Once you are registered, heed this WARNING. The information you see on the CRA website is based upon your previous year’s tax return. You will see your RRSP and TFSA contribution room available to you. If you have made contributions since your last tax filing they will not show up until you file your next tax return. It is easy to make over contributions is you don’t keep this in mind.
What are T3 Tax Slips?
A Canadian T3 tax slip, or Statement of Trust Income Allocations and Designations, is prepared and issued by financial administrators and trustees to tell you and the Canada Revenue Agency (CRA) how much income you received from investment in mutual funds in non-registered accounts, from business income trusts or income from an estate for a given tax year.
Deadline for T3 Tax Slips
Unlike most other tax slips, T3 tax slips do not have to be mailed until the last day of March the year after the calendar year to which the T3 tax slips apply.
Sample T3 Tax Slip
This sample T3 tax slip from the CRA site shows you what a T3 looks like. See the second page (the back of the T3 slip) for more information on what is included in each box.