My discount broker has refused to correct an error on a T3 Summary of Trust Income slip that indicates I have disposed of an exchange-traded fund that I have never sold. The T3 slip lists an amount of $1,122.51 in Box 53, “Capital gains from dispositions after June 24, 2024.″ However, a review of my 2024 statements confirms that I have never sold this ETF, so no disposition has taken place. My broker has refused to amend the T3, however, and suggests instead that I seek advice from a tax accountant. Do I have any options for pursuing this error and insisting on a correction? Must I claim a non-existent capital gain on my tax return on the basis of this erroneous T3? If so, how do I make Revenue Canada aware of this dispute?
Let me reassure you about a couple of things. First, you aren’t the only one pulling your hair out this tax season. The Canada Revenue Agency has been plagued by myriad problems recently, with software glitches and the government’s proposed – and recently cancelled – increase to the capital-gains inclusion rate contributing to widespread confusion among taxpayers.
Second, as confusing as your T3 slip is, the information on it is likely accurate and not a mistake by your broker. It’s just that you (and I’m guessing lots of others) aren’t interpreting it correctly. The good news, as I’ll explain, is that you won’t have to pay any tax to the CRA that you don’t actually owe.
After receiving your question, I reviewed all of the T3 slips issued to my family for the 2024 tax year. Sure enough, every one of the slips showed capital-gains amounts in Box 53, even though, like you, none of us sold any ETF units last year.
What’s going on here? The source of the confusion is the word “dispositions.”
On your T3, dispositions refer to sales of securities by the ETF itself, not dispositions of ETF units by you, the investor. (Any sales by you would be shown on your T5008 Statement of Securities Transactions.) But even though you didn’t dispose of any of your ETF units, you’re still responsible for paying tax on capital gains realized internally by the fund.
With ETFs, capital gains can arise from different sources. Funds buy and sell securities throughout the year, which triggers gains and losses. Securities held by the ETF, such as real estate investment trusts, may also distribute capital gains. To avoid paying high taxes at the fund level, ETFs distribute their capital gains (and other income) to unitholders, either as part of the ETFs’ regular cash payouts or as a year-end reinvested or “phantom” distribution. The capital-gains income is then taxed in unitholders’ hands, typically at lower rates than the fund would pay.
You may have noticed that your T3 also has a Box 52, labelled “Capital gains from dispositions before June 25, 2024.” Again, this refers to dispositions by the fund itself, not sales by you. But here’s the thing: the before and after dates on your T3 are no longer relevant. They refer to the timing of the proposed increase to the capital-gains inclusion rate, which the federal government deferred in January and then cancelled outright in March.
For your purposes, the only capital-gains number that matters is the one in Box 21, which is labelled – appropriately enough – “Capital gains”. This is the sum of Box 52 and Box 53, and it represents the total capital gain that will be reported on your return from all sources included on the T3.
Incidentally, if you dig up one of your old T3 slips from 2023 – the year before the Liberal government proposed the capital-gains tax change – you’ll notice that there is no Box 52 or Box 53, and the word “dispositions” does not appear. Those slips were easier to understand. Hopefully, they will be back next year.
Regarding your recent column about restaurant royalty funds, can you explain what sort of income these entities distribute and how it is taxed?
It depends on the company and the year.
Pizza Pizza Royalty Corp. (PZA), for instance, is a corporation whose monthly dividends are 100-per-cent eligible for the Canadian dividend tax credit. Similarly, distributions from Keg Royalties Income Fund (KEG.UN) also consisted entirely of eligible dividends for 2024 and 2023, but in previous years also included a small amount of return of capital. Distributions from SIR Royalty Income Fund (SRV.UN) also consist largely – or, in some years, entirely – of eligible dividend income, while Boston Pizza Royalties Income Fund typically pays a mix, with dividends accounting for the lion’s share of the payouts.
You can find detailed historical information about the tax treatment of distributions in the investor relations sections of the companies’ websites.
As you mentioned in a recent column, when one transfers shares with an unrealized loss from a non-registered account to a tax-free savings account or registered retirement account, one cannot claim the loss for tax purposes. You therefore recommended selling the stock and then transferring the cash to the registered account. My question is: What happens tax-wise if there is an accrued gain, not a loss?
Sorry to be the bearer of bad news, but if you transfer shares with a capital gain from a non-registered to a registered account, for tax purposes you are deemed to have sold the shares at their market value at the time of the transfer. You will have to report the capital gain on your tax return.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.