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T3s and Segregated Funds: Q&A

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Many investors are concerned when the taxable amounts reported on their T3 at year end do not seem to relate to the value of their non-registered policy. The following explanations are provided by Canada Life.

Generally, for holders of non-registered policies, tax consequences will arise from funds that have had positive returns and unrealized capital gains. There are two ways you could be affected:

  • Unrealized gains and losses within the funds may be triggered as a result of the manager and/or mandate change.
  • Any redemptions or switches done by you could also create direct gains or losses.

How does changing the underlying holdings create tax implications for me?

When a fund manager changes the underlying holdings of a segregated fund it may result in a gain or loss being realized, and this gain or loss is allocated to the unit holders. Income and capital gain allocations increase the Adjusted Cost Base (ACB) of a segregated fund to ensure these amounts are not taxed again at withdrawal. In the event of a capital loss, the capital loss allocation will decrease the ACB of the segregated fund.

 

What are the tax consequences if I withdraw or switch funds?

If you withdraw or switch from a segregated fund, the result will be either a capital gain or loss. The capital gain or loss equals the difference between the market value and the adjusted cost base on the date of the transaction. Capital gains or losses must be reported on your personal income tax return. Please note that current-year gains or losses can be offset by gains or losses in previous or subsequent taxation periods. We suggest you consult with your personal tax advisor to better understand these issues.

 

I haven’t sold any units, so why did I receive a T3 slip/ Relevé 16?

A T3 slip is generated when unit holders have earned income from within a non-registered segregated fund policy. At the end of the year, the income allocated to each unit holder is reported on a T3 slip (and Relevé 16 for Quebec residents). If you haven’t sold any units, you may still be earning income as a result of the allocation from each of your segregated funds.

 

My statement shows positive market returns, how could there be a loss?

If the cost of the holdings owned by the segregated fund is greater than the market value at the date the fund manager decides to sell, a loss occurs. A segregated fund allocates these capital losses to unit holders on a T3, so that they will be able to claim the loss on their personal income tax return.

If you haven’t surrendered units during the prior year, your tax slips will report your allocated share of the capital losses from activity within the fund.

 

The value of the fund has declined, so why is there income or a capital gain reported on my T3 slip / Relevé 16?

Taxable income is not related to changes in market value. Your T3 slip is reporting your share of the income and capital gain of the segregated fund plus any capital gain or loss from the surrender of units. The change in value over the year in the fund represents an unrealized capital loss because their market value has declined. The T3 does not include unrealized income.