*** Transcriber's Note: Please set your voice synthesizer to read most punctuation. Throughout this document, if you encounter the caret (^) sign, please enter the applicable information, if necessary. Areas outlined in red are indicated by three back-slashes (\\\) at the beginning and at the end. Three plus (+++) signs will indicate the start and the end of charts. *** FRONT COVER Canada Customs and Revenue Agency T3 Trust Guide 2003 T4013(E) Revision 2003 More Ways to Serve You! PAGE 2 What's new for 2003? \\\ A number of legislative proposals have been introduced and may not become law before this guide is published. Therefore, anything contained within a red box (such as this one) should be read as being "under proposed legislation." Definitions The definition of common-law partner has changed. For more information, see page 5. There is a new definition for "contribution" in relation to grandfathered inter vivos trusts. For more information, see page 5. This definition is needed when completing the T3 return. There are also changes to "designated beneficiary" for the purpose of Part XII.2 tax. See page 40 for more information. Gifts and federal political contribution tax credit The terms "eligible amount" and "advantage" are used when discussing the federal political contribution tax credit and in relation to gifts and capital gains. These terms are defined on page 6. For a more detailed explanation, see the Gifts and Income Tax pamphlet. Foreign retirement arrangements An amount from a foreign retirement arrangement may have to be included in a trust's pension income. For more information, see page 17. Tax slips You can now provide T3 slips in an electronic format. The recipient has to consent in writing or by email. For more information, see "Distributing the T3 slip" on page 49. We will no longer be providing carbon-loaded versions of the T3 slips once the existing stock has been used. The T3 slip will continue to be available in the non-carbon version. Reference page We have added a reference page that lists some of the more common publications you may need to help you prepare your T3 return. This is found at the end of the guide on page 57. \\\ Visually impaired persons can get our publications in braille, large print, or etext (computer diskette), or on audio cassette by visiting our Web site at www.ccra.gc.ca/alternate or by calling 1-800-267-1267 weekdays from 8:15 a.m. to 5:00 p.m. (Eastern Time). PAGE 3 Before you start Is this guide for you? In this guide, you will find information on how to complete the T3 Trust Income Tax and Information Return, the T3 slip, Statement of Trust Income Allocations and Designations, and the T3 Summary, Summary of Trust Income Allocations and Designations. Use this guide if you are filing a return for either a testamentary trust or an inter vivos trust described in "Types of trusts" on page 7. For easier reading, we have used the word "you" throughout the guide to mean the trustee, executor, administrator, liquidator, or anyone preparing the return for a trust. We use "the Act" to refer to the Income Tax Act, and "the Regulations" to refer to the Income Tax Regulations. We have used plain language to explain the most common tax situations for trusts. If you need more help after reading this guide, you can call any of our tax services offices at 1-800-959-8281. For our addresses and other telephone numbers, see the listings in the government section of your telephone book and on the "Contact us" page of our www.ccra.gc.ca Web site. Do you need to read the whole guide? If you are filing a T3 return for an estate that has only pension income, investment income, or death benefits, you do not need to read the entire guide. We have used the \\ symbol to lead you to the information you may need. This symbol appears in the table of contents, in the right margins of the guide, and in the left margins of the return, beside the lines that may relate to this situation. *** Transcriber's Note: The \\ symbol will be indicated at the beginning of a line in the Tables of Contents for the guide; and will also be indicated at the beginning of a line for the return. *** Before you start to complete the return, be sure to read: - "Chapter 1 - General information"; - the introduction and "Step 1 - Identification and other required information " in Chapter 2; and - the introduction and "Recipient identification number" in Chapter 4. Non-resident trusts If you are a non-resident trust, or a deemed resident trust (as defined on page 8), there are special rules that apply in some situations. Not all of these are covered in this guide. For more information, contact the International Tax Services Office at the numbers listed on page 12. Which tax package should you use? Use the provincial or territorial forms package for the province or territory where the trust was resident on the last day of its taxation year. You can get any other schedules and forms that you may need from our Web site or by calling 1-800-959-2221. Once you have completed the necessary schedules, forms, and statements, you will be ready to complete the return. Attach all documents to the return. Note The province of Quebec collects its own provincial income tax. Therefore, do not calculate provincial income tax on the trust's federal return if it was resident in Quebec on the last day of its taxation year. However, if the trust had income from a business with a permanent establishment in another province or territory, you have to calculate that province's or territory's income tax on the trust's federal tax return. Fairness and client rights At the Canada Customs and Revenue Agency, promoting fairness and client rights has long been a key goal. Recently, as part of the Fairness Initiative, we formalized our commitment to enhanced fairness through Our Fairness Pledge. We also publish a declaration of clients' rights, as well as a guide called Your Rights. To get a copy of this guide or more information on fairness and client rights, contact your tax services office or visit our Web site at www.ccra.gc.ca on the "Appeals" page. PAGE 4 Table of contents Glossary, page 5 Chapter 1 - General information, page 7 Types of trusts, page 7 \\ Who should file page 10 \\ What to file page 11 \\ When to file page 11 Taxation year, page 11 Filing dates, page 12 \\ Where to file page 12 \\ How to file page 12 \\ Penalties and interest page 13 \\ After you file page 13 Clearance certificate, page 14 Chapter 2 - Completing the return, page 14 Transfers and loans of property, page 14 Split income of a minor beneficiary, page 15 \\ Step 1 - Identification and other required information page 15 Reporting foreign income and property, page 16 Other required information, page 16 Step 2 - Calculating total income: Lines 01 to 20, page 16 Step 3 - Calculating net income: Lines 21 to 50, page 19 Step 4 - Calculating taxable income: Lines 51 to 56, page 21 Form T3A, Request for Loss Carryback by a Trust, page 21 Step 5 - Summary of tax and credits: Lines 81 to 100, page 22 Chapter 3 - Trust schedules and forms, page 24 Schedule 1 - Dispositions of Capital Property, page 24 Testamentary trust elections, page 24 Capital gains, page 25 Capital dispositions - Rules for trusts, page 25 Capital gains deduction, page 29 Form T1055, Summary of Deemed Realizations, page 29 Form T2223, Election, Under Subsection 159(6.1) of the Income Tax Act, by a Trust to Defer Payment of Income Tax, page 31 Transfer of trust property to another trust, page 31 \\ Schedule 8 - Investment Income, Carrying Charges, and Gross-up Amount of Dividends Retained by the Trust page 31 \\ Schedule 9 - Income Allocations and Designations to Beneficiaries page 33 \\ Allocations and designations page 33 Exceptions and limits to income allocations, page 33 \\ Income to be taxed in the trust page 35 \\ How to complete Schedule 9 page 37 Schedule 10 - Part XII.2 Tax and Part XIII Non-Resident Withholding Tax, page 40 Completing the NR4 return, page 42 Schedule 11 - Federal Income Tax, page 42 Schedule 12 - Minimum Tax, page 45 \\ Provincial and territorial income tax page 45 Chapter 4 - T3 slip and summary, page 46 \\ Recipient identification number page 46 \\ How to complete the T3 slip page 46 \\ Distributing the T3 slip page 49 How to amend, cancel, or issue a duplicate T3 slip, page 49 \\ Appendix A - T3 slip and summary page 50 Index, page 53 References, page 57 Contacting us, page 58 PAGE 5 Glossary This glossary provides a general description of the technical terms we use in this guide. Administrator - a person appointed by a court to settle the estate of a deceased person. Allocate, allocation - to assign, set apart, or distribute income from the trust to a beneficiary, when one of the following applies: - the beneficiary is entitled to the income under the trust document; - the trust makes a preferred beneficiary election to include the trust income in the beneficiary's income; or - the beneficiary is paid income at the discretion of the trustee. In most cases, the amounts you allocate have to be included in the beneficiary's income, and are deducted from the trust's income. For exceptions to this general rule, see "Exceptions and limits to income allocations" on page 33. Arm's length transaction - a transaction between persons who each act in their own self-interest. Related persons are not considered to deal with each other at arm's length. Related persons include: - individuals connected by blood relationship, marriage, common-law partnership, or adoption. - a corporation and a shareholder who controls the corporation. If a taxpayer, or any person not dealing at arm's length with that taxpayer, is beneficially interested in a specified personal trust (as defined in Chart 1 on page 8), the taxpayer is not considered to be dealing at arm's length with that trust. For more information, see Interpretation Bulletin IT-419, Meaning of Arm's Length. Beneficiary - the person for whose benefit the trust is created, the person to whom the amount of an insurance policy or annuity is payable, or the unit holder of a mutual fund trust. Common-law partner - this applies to a person of the opposite or same sex who is not your spouse (see page 6) with whom you live and have a relationship and to whom at least one of the following situations applies. He or she: - is the natural or adoptive parent (legal or in fact) of your child; - has been living and having a relationship with you for at least 12 continuous months; or - lived with you previously for at least 12 continuous months as your spouse or common-law partner. \\\ Note Under proposed changes, the last condition will no longer exist. The effect of this proposed change is that a person (other than the parent of your child) will be your common-law partner only after your current relationship with that person has lasted at least 12 continuous months. This proposed change will apply to 2001 and later years once it becomes law. If this change will affect the trust's return for 2001 or 2002, contact us. \\\ Reference to "12 continuous months" in this definition includes any period that you were separated for less than 90 days because of a breakdown in the relationship. \\\ Contribution - generally refers to a transfer or loan of property, other than an arm's length transfer by a particular entity, to a non-resident trust including: - a series of transfers or loans that results in a transfer or loan to the non-resident trust; and - a transfer or loan made by an entity as a result of a transfer or loan involving the non-resident trust. \\\ Deemed disposition - used when you are considered to have disposed of property, even though you did not sell it. Designate, designation - to keep the identity of certain types of allocated income or credits. In this way, the beneficiaries can take advantage of deductions or credits that relate directly to the type of income, such as the dividend tax credit or pension income amount. Generally, you report amounts designated to a beneficiary in the appropriate box on the T3 slip. Distribute, distribution - to divide the estate property among the beneficiaries according to the terms of the trust document, or according to the applicable law. Elect, election - to choose whether to do something allowed under the law. Excluded property - a share of the capital stock of a non-resident-owned investment corporation that is not taxable Canadian property. Executor - an individual or trust institution named in a will and confirmed by a court to settle the testator's estate. We define "testator" on the next page. Exempt property - is trust property that, if disposed of, any income or capital gain resulting from the disposition is exempt from Canadian taxation, either because the trust is not resident in Canada, or because of a tax treaty. Flow-through entity - any of the following: - an investment corporation; - a mortgage investment corporation; - a mutual fund corporation; - a mutual fund trust; - a partnership; - a related segregated fund trust; - a trust governed by an employees profit sharing plan; - a trust created to hold shares of the capital stock of corporations for the benefit of their employees; - a trust established for the benefit of creditors to secure certain debt obligations; or - a trust established to hold shares of the capital stock of a corporation to exercise the voting rights attached to such shares. PAGE 6 Gift - a voluntary transfer of property (including money). \\\ Under proposed legislation, for gifts made after December 20, 2002, this includes a gift where the donee receives an advantage, as long as the advantage does not exceed 80% of the fair market value of the property, or it is reasonable to assume the property was transferred with the intention of making a gift. Also, see the definition of "inter vivos gift." \\\ The eligible amount of a gift is the amount by which the fair market value (FMV) of the gifted property exceeds the amount of the advantage, if any, received for the gift. The amount of the advantage in respect of a gift includes the total value at the time the contribution was made, of all property, services, compensation, or other benefits to which the trust, or a person not dealing at arm's length with the trust, is entitled as partial consideration for, or in gratitude for, the gift or contribution. Inter vivos - between living persons. Inter vivos gift - a gift of property by a living person (donor). The property has to be delivered during the lifetime of the donor and without reference to his or her death. Liquidator - in Quebec, the liquidator is responsible for distributing the assets of all estates established after December 31, 1993. For estates with a will, the liquidator's role is similar to an executor's. For estates without a will, the liquidator acts as the administrator of the estate. Preferred beneficiary - for taxation years after 1996, a person resident in Canada who is a beneficiary under the trust at the end of the year, and who is one of the following: - the settlor of the trust (see the definition of "settlor" on this page); - the spouse or common-law partner, or former spouse or common-law partner, of the settlor of the trust; - a child, grandchild, or great-grandchild of the settlor of the trust; or - the spouse or common-law partner of a child, grandchild, or great-grandchild of the settlor of the trust. In addition, this person has to meet one of the following conditions: - can claim a disability amount for the taxation year that ends in the trust's taxation year or could have claimed the disability amount if attendant or nursing home care expenses claimed in respect of his or her care had been otherwise ignored; or - is 18 or older and, for the taxation year that ends in the trust's taxation year, does not claim a disability amount, and for whom another individual can claim an amount for infirm dependants 18 and older for that beneficiary, or could claim the amount if the beneficiary's income is calculated before including the income from the preferred beneficiary election. Principal residence - generally, any of the following: - a housing unit; - a leasehold interest in a housing unit; or - a share of a co-operative housing corporation, if the share is acquired for the sole purpose of obtaining the right to live in a housing unit owned by that corporation. For more information, see "Principal residence" on page 28. Settlor - the person who sets up a trust, or the person who transfers property to a trust. For more information about the restrictive meaning of settlor, see Interpretation Bulletin IT-374, Meaning of "Settlor." Spouse - this applies only to a person who is legally married. Testator - the deceased person who made and left a valid will. Trust - a binding obligation, voluntarily undertaken, but enforceable by law when undertaken. It may be created by one of the following: - a person (either verbally or in writing); - a court order; or - a statute. A trust has three essential characteristics. There has to be certainty of: - the intent to create a trust; - the property to be placed in trust; and - who the beneficiaries of the trust are. Trustee - an individual or trust institution that holds legal title to property in trust for the benefit of the trust beneficiaries. The trustee includes an executor, administrator, assignee, receiver, or liquidator who owns or controls property for some other person. Vested interest - an immediate fixed interest in property, although the right of possession and enjoyment may be postponed. Will - a legally enforceable document that declares the intentions about disposal and administration of the testator's estate after his or her death. It is effective only at death and can be revoked at any time before death. PAGE 7 Chapter 1 - General information This chapter provides general information on the different types of trusts and the filing requirements for each. Types of trusts A trust is either a testamentary trust or an inter vivos trust. You need to know the type of trust, since different tax rules apply to different trusts. Chart 1 describes the different types of trusts that we discuss in this guide. \\ Testamentary trust A testamentary trust is a trust or estate that is generally created on the day a person dies. All testamentary trusts are personal trusts. The terms of the trust are established by the will or by court order in relation to the deceased individual's estate under provincial dependant's relief or support law. Generally, this type of trust does not include a trust created by a person other than a deceased individual, or a trust created after November 12, 1981, if any property was contributed to it other than by a deceased individual. Contact us for rules about testamentary trusts created before November 13, 1981. \\\ For taxation years ending after December 20, 2002, if the trust incurs a debt or other obligation to pay an amount to, or guaranteed by, a beneficiary or person or partnership with whom the beneficiary does not deal at arm's length, the testamentary trust may become an inter vivos trust. This does not apply if the debt or other obligation was incurred by the trust in satisfaction of a beneficiary's right to enforce payment of an amount payable by the trust to the beneficiary or to receive any part of the trust's capital. \\\ If the assets are not distributed to the beneficiaries according to the terms of the will, the testamentary trust may become an inter vivos trust. Inter vivos trust An inter vivos trust is a trust that is not a testamentary trust. Grandfathered inter vivos trust A grandfathered inter vivos trust is one established before June 18, 1971, which: - was resident in Canada without interruption from June 18, 1971, until the end of the taxation year; - did not carry on any active business in the taxation year; - did not receive any property as a gift since June 18, 1971; - after June 18, 1971, did not incur any debt or obligation to pay an amount to, or guaranteed by, any person with whom any beneficiary of the trust was not dealing at arm's length; - did not receive any property after December 17, 1999, as a transfer from another inter vivos trust, where: - the other trust is not grandfathered; and - there is no change in the beneficial ownership of the property on its transfer; and \\\ - for taxation years beginning after 2002, did not receive any contributions (as defined on page 5) after June 22, 2000. Note When a trust has elected to be treated as a deemed resident trust for 2000, 2001 or 2002, this additional condition will apply to the determination of the status of the trust as a grandfathered inter vivos trust for those taxation years as well. Attach a letter to the T3 return asking to have section 94 of the Income Tax Act apply for those years. Call us for the date by which this election must be received. \\\ +++ Chart 1 - Types of Trusts \\ Type of trust: Personal trust General information: This is either: - a testamentary trust; or - an inter vivos trust in which no beneficial interest was acquired for consideration payable either to the trust, or a person who contributed to the trust. The person or related persons who create an inter vivos trust may acquire all the interests in it without the trust losing its status as a personal trust. After 1999, a unit trust is not a personal trust. Type of trust: Alter ego trust General information: This is an inter vivos trust created after 1999 by a settlor who was 65 years of age or older at the time the trust was created, for which the settlor is entitled to receive all the income that may arise during his or her lifetime, and is the only person who can receive, or get the use of, any income or capital of the trust during the settlor's lifetime. A trust will not be considered to be an alter ego trust if you file an election with the trust's return for its first taxation year asking not to have this provision of the Act apply. PAGE 8 Chart 1 - (continued) Type of trust: Specified personal trust General information: This is a personal trust but does not include: an amateur athlete trust; an employee trust; a master trust; a trust governed by a deferred profit sharing plan, an employee benefit plan, an employees profit sharing plan, a foreign retirement arrangement, a registered education savings plan, a registered pension plan, a registered retirement income fund, a registered retirement savings plan, or a registered supplementary unemployment benefit plan; a related segregated fund trust; a retirement compensation arrangement trust; a trust whose direct beneficiaries are one of the aforementioned trusts; a trust governed by an eligible funeral arrangement or a cemetery care trust; and a communal organization. Type of trust: Joint spousal or common-law partner trust General information: This is an inter vivos trust created after 1999 by a settlor who was 65 years of age or older at the time the trust was created, for which the settlor and the settlor's spouse or common-law partner are entitled to receive all the income that may arise from the trust before the later of their deaths, and are the only persons who can receive, or get the use of, any income or capital of the trust before the later of their deaths. \\ Type of trust: Spousal or common-law partner trust General information: A post-1971 spousal or common-law partner trust includes both a testamentary trust created after 1971, and an inter vivos trust created after June 17, 1971, for which the living beneficiary spouse or common-law partner is entitled to receive all the income that may arise during the lifetime of the spouse or common-law partner, and that spouse or common-law partner is the only person who can receive, or get the use of, any income or capital of the trust during his or her lifetime. A pre-1972 spousal trust includes both a testamentary trust created before 1972, and an inter vivos trust created before June 18, 1971, for which the beneficiary spouse was entitled to receive all the income during the spouse's lifetime, and no other person received, or got the use of, any income or capital of the trust. These conditions must be met for the period beginning on the day the trust was created, up to the earliest of the following dates: - the day the beneficiary spouse dies; - January 1, 1993; or - the day on which the definition of a pre-1972 spousal trust is applied. Type of trust: Deemed resident trust General information: This is a trust resident in another country, but which is considered resident in Canada for certain tax purposes. Usually, such a trust has received a contribution from a resident or former resident of Canada. A trust is a deemed resident if: - a resident of Canada transferred property to the trust and is either beneficially interested in the trust (for example, as a beneficiary of the trust), or is related to such a person (including an aunt, uncle, nephew, or niece of the beneficiary); or - the beneficiary acquired an interest in the trust by way of purchase or as a gift or inheritance from a Canadian resident who transferred property to the trust. Under proposed legislation, a trust will generally be considered to be a deemed resident if it acquired property from a person who is resident in Canada or if any of the beneficiaries are resident in Canada and a contribution was made by a resident or former resident of Canada. Contact us if you need more assistance in determining whether the trust is a deemed resident of Canada. Type of trust: Unit trust General information: This is an inter vivos trust for which the interest of each beneficiary can be described at any time by referring to units of the trust. The trust must reside in Canada, and its only undertaking is the investing of its funds in property (other than real property, or an interest in real property), and/or acquiring, maintaining, improving, leasing, or managing real property or an interest in real property that is capital property of the trust. The trust also has to satisfy the other conditions of the Act, as outlined in subsection 108(2). Type of trust: Mutual fund trust General information: This is a unit trust that resides in Canada. It also has to comply with the other conditions of the Act, as outlined in section 132 and the conditions prescribed by Regulation 4801. Type of trust: Communal organization General information: We consider an inter vivos trust to exist when a congregation: - has members who live and work together; - adheres to the practices and beliefs of, and operates according to the principles of, the religious organization of which it is a part; - does not permit its members to own property in their own right; - requires that its members devote their working lives to the congregation's activities; and - carries on one or more businesses directly, or manages or controls the businesses through a business agency, such as a corporation or trust, to support or sustain its members or the members of another congregation. The communal organization has to pay tax as though it were an inter vivos trust. However, it can elect to allocate its income to the beneficiaries. For more information, see Information Circular 78-5, Communal Organizations. PAGE 9 Chart 1 - (continued) Type of trust: Retirement compensation arrangement (RCA) General information: This arrangement exists when an employer makes contributions for an employee's retirement, termination of employment, or any significant change in services of employment. For more information, see the Retirement Compensation Arrangements Guide. Filing note: You have to file a T3 return for the portion of an RCA that is treated as an employee benefit plan. A T3-RCA, Part XI.3 Tax Return - Retirement Compensation Arrangement (RCA), has to be filed to report the income of the other portion of the plan. Type of trust: Employee benefit plan General information: Generally, this is any arrangement under which an employer makes contributions to a custodian, and under which one or more payments will be made to, or for the benefit of, employees, former employees, or persons related to them. For more information, and for details on what we consider to be an employee benefit plan and how it is taxed, see Interpretation Bulletin IT-502, Employee Benefit Plans and Employee Trusts, and its Special Release. Filing note: An employee benefit plan has to file a return if the plan or trust has tax payable, has a taxable capital gain, or has disposed of capital property. Because the allocations are taxed as income from employment to the beneficiaries, report the allocations on a T4 slip, not on a T3 slip. For more information, see the guides called Filing the T4 Slip and Summary Form and Filing the T4F Slip and Summary Form. Type of trust: Salary deferral arrangement General information: Generally, this is a plan or arrangement (whether funded or not) between an employer and an employee or another person who has a right to receive salary or wages in a year after the services have been rendered. For more information, see Interpretation Bulletin IT-529, Flexible Employee Benefit Programs. Filing note: If a salary deferral arrangement is funded, we consider it a trust, and you may have to file a T3 return. The deferred amount is deemed to be an employment benefit, so you report it on a T4 slip, not a T3 slip. The employee has to include the amount in income for the year the services are rendered. The employee also has to include any interest, or other amount earned by the deferred amount. For more information, see the guides called Filing the T4 Slip and Summary Form and Filing the T4F Slip and Summary Form. Type of trust: Insurance segregated fund trust General information: Considered to be an inter vivos trust, this is a related segregated fund of a life insurer for life insurance policies. The fund's property and income are considered to be the property and income of the trust, with the life insurer as the trustee. Filing note: You have to file a separate return and financial statements for each fund. If all the beneficiaries are fully registered plans, complete only the identification and certification areas of the return and enclose the financial statements. If the beneficiaries are both registered and non- registered plans, report and allocate only the income that applies to the non- registered plans. Type of trust: Non-profit organization General information: This is an organization (for example, club, society, or association) that is usually organized and operated exclusively for social welfare, civic improvement, pleasure, recreation, or any other purpose except profit. The organization will generally be exempt from tax if no part of its income is payable to, or available for, the personal benefit of a proprietor, member, or shareholder. For more information, see Interpretation Bulletin IT- 496, Non-Profit Organizations. Note that if the main purpose of the organization is to provide services such as dining, recreational, or sporting facilities to its members, we consider it to be an inter vivos trust. In this case, the trust is taxable on its income from property, and on any taxable capital gains from the disposition of any property that is not used to provide those services. The trust is allowed a deduction of $2,000 when calculating the trust's taxable income. Claim this on line 54 of the return. For more information, see Interpretation Bulletin IT-83, Non-Profit Organizations - Taxation of Income From Property. Filing note: A non-profit organization may have to file Form T1044, Non-Profit Organization (NPO) Information Return. For more information, see the Income Tax Guide to the Non-Profit Organization (NPO) Information Return. PAGE 10 Chart 1 - (continued) Type of trust: Employee trust General information: This is an inter vivos trust. Generally, it is an arrangement established after 1979, under which an employer makes payments to a trustee in trust for the sole benefit of the employees. The trustee has to elect to qualify the arrangement as an employee trust on the trust's first return. The employer can deduct contributions to the plan only if the trust has made this election and filed it no later than 90 days after the end of its first taxation year. To maintain its employee trust status, each year the trust has to allocate to its beneficiaries all non-business income for that year, and employer contributions made in the year. Business income cannot be allocated and is taxed in the trust. For more information, see Interpretation Bulletin IT-502, Employee Benefit Plans and Employee Trusts, and its Special Release. Filing note: An employee trust has to file a return if the plan or trust has tax payable, has a taxable capital gain, or has disposed of capital property. Because the allocations are taxed as income from employment to the beneficiaries, report the allocations on a T4 slip, not a T3 slip. For more information, see the guides called Filing the T4 Slip and Summary Form and Filing the T4F Slip and Summary Form. Type of trust: Master trust General information: This is an inter vivos trust. A trust can elect to be a master trust if during the entire time since its creation it met all of the following conditions: - it was resident in Canada; - its only undertaking was the investing of its funds; - it never borrowed money except for a term of 90 days or less (for this purpose, the borrowing cannot be part of a series of loans or other transactions and repayments); - it has never accepted deposits; and - each of its beneficiaries is a registered pension plan or a deferred profit sharing plan. Filing note: A master trust is exempt from Part I tax. A trust can elect to be a master trust by indicating this in a letter filed with its return for the taxation year the trust elects to become a master trust. Once made, this election cannot be revoked. However, the trust must continue to meet the conditions listed above, to keep its identity as a master trust. After the first T3 return is filed for the master trust, you do not have to file any further T3 returns for this trust. However, if the trust exceeds the foreign content limit, you may have to file a T3D, Income Tax Return for Deferred Profit Sharing Plan (DPSP) or Revoked DPSP, or a T3P, Employees' Pension Plan Income Tax Return. For more information, get a copy of these returns. Type of trust: RRSP, RRIF, or RESP trust General information: Filing note: An RRSP, RRIF, or RESP trust has to complete and file a T3 return if the trust meets one of the following conditions: - the trust has borrowed money and paragraph 146(4)(a) or 146.3(3)(a) of the Act applies; - the RRIF trust received a gift of property and paragraph 146.3(3)(b) of the Act applies; or - the last annuitant has died and paragraph 146(4)(c) or subsection 146.3(3.1) of the Act applies. If this is the case, claim an amount on line 43 of the T3 return only if the allocated amounts were paid in accordance with paragraph 104(6)(a.2) of the Act. If the trust does not meet one of the above conditions and the trust held non- qualified investments during the taxation year, you have to complete a T3 return to calculate the taxable income from non-qualified investments, determined under subsection 146(10.1) or 146.3(9). If the trust is reporting capital gains or losses, it has to report the full amount (that is, 100%) on line 01 of the return. If the trust does not meet one of the above conditions and the trust carried on a business, you have to complete a T3 return to calculate the taxable income of the trust from carrying on a business. Do not include the business income earned from the disposition of qualified investments for the trust. +++ \\ Who should file You have to file a return if income from the trust property is subject to tax, and in the taxation year the trust: - has tax payable; - is a Canadian resident and has either disposed of, or is deemed to have disposed of, a capital property or has a taxable capital gain; - is a non-resident throughout the year, and has a taxable capital gain or has disposed of taxable Canadian property; - is a deemed resident trust; - holds property which is subject to subsection 75(2); - has provided a benefit of more than $100 to a beneficiary for upkeep, maintenance, or taxes for property maintained for the beneficiary's use (for more information, see Line 43 on page 20); or - receives from the trust property any income, gain, or profit that is allocated to one or more beneficiaries, and the trust has: - total income from all sources of more than $500; PAGE 11 - income of more than $100 allocated to any single beneficiary; or - allocated any portion of the income to a non-resident beneficiary. Note You may not have to file a return if the estate is distributed immediately after the person dies, or if the estate did not earn income before the distribution. In these cases, you should give each beneficiary a statement showing his or her share of the estate. \\ What to file Trusts listed in Chart 1 may have to file a T3 Trust Income Tax and Information Return, and any related schedules and statements, if they meet the requirements listed in "Who should file" The T3 return is filed as both an income tax return, which calculates tax liability, and an information return, which reports amounts allocated and designated to beneficiaries. You may also have to file the following forms, depending on the type of amounts paid or allocated by the trust. - If the trust allocated amounts to resident beneficiaries, use the T3 Summary and the related T3 slips. See Chapter 4 on page 46 for more information. - If the trust paid executor, liquidator, or trustee fees to a resident of Canada, or if an employee benefit plan or an employee trust made distributions other than a return of employee contributions, use a T4 Summary, Summary of Remuneration Paid, and the related T4 slips, Statement of Remuneration Paid. For more information, see the guide called Filing the T4 Slip and Summary Form. - If the trust paid scholarships, fellowships, bursaries, prizes, or research grants to a resident of Canada, use a T4A Summary, Summary of Pension, Retirement Annuity, and Other Income, and the related T4A slips, Statement of Pension, Retirement, Annuity, and Other Income. For more information, see the guide called Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary Form. - If the trust paid or credited, or is considered to have paid or credited, amounts to a non-resident beneficiary, use an NR4 Summary, Return of Amounts Paid or Credited to Non-Residents of Canada, and the related NR4 slips, Statement of Amounts Paid or Credited to Non-Residents of Canada. For more information, see the Non-Resident Withholding Tax Guide. - If the trust paid fees to a non-resident of Canada for services performed in Canada, use a T4A-NR Summary, Fees, Commissions, or Other Amounts Paid to Non- Residents for Services Rendered in Canada, and the related T4A-NR slips, Statement of Fees, Commissions, or Other Amounts Paid to Non-Residents for Services Rendered in Canada. For more information, see the Non-Resident Withholding Tax Guide. Note For the first T3 return filed, ensure a copy of the will or trust document is attached. \\ When to file The filing due date depends on the trust's taxation year-end. Taxation year Inter vivos trust The taxation year-end of an inter vivos trust is December 31, except for a mutual fund trust that elects to have a December 15 year-end. A mutual fund trust that previously elected to have a December 15 year-end can revoke the election. For more information, contact us. Testamentary trust The taxation year-end of a testamentary trust may be, but does not have to be, December 31. The first taxation period of the trust begins on the day after the person dies, and ends at any time you select within the next 12 months. The tax rates used, and the tax year of the slips issued to the beneficiaries, are based on the year-end of the trust. You may prefer to choose a December 31 (calendar) year-end for a testamentary trust for several reasons: - Availability of forms - The current-year trust returns and related schedules are usually not available until the end of the calendar year. A 2004 return due before the forms are available would have to be filed on a 2003 form, which might not contain current-year changes or information. - Easier form completion - Generally, it is easier to complete forms and interpret rules when the taxation year coincides with the calendar year. - Availability of information - Most information slips for income amounts are issued for a calendar year (for example, a T5 slip for bank interest). - Minimum delay in assessing the return - Changes to law generally require changing the processing procedures for the return. If the return has a taxation year ending early in a calendar year, we may have to delay assessing the return until the law is passed and the new procedures are in place. However, there may be advantages to choosing a non-calendar year-end. Elections to transfer certain estate losses incurred and certain gains realized on employee security options (stock options) during the first taxation year of the trust to the deceased person's return for the year of death, and the timing of income receipts may play an important role when you choose the trust's taxation year. Once you establish the trust's year-end, you cannot change it without our approval. Requests will be approved only if the change is for sound business reasons. Normally, retroactive changes will not be approved. For more information, see Interpretation Bulletin IT-179, Change of Fiscal Period. Note If the assets of the testamentary trust are not distributed to the beneficiaries according to the terms of the will, the testamentary trust may become an inter vivos trust. If this is the case, change the taxation year of the trust to PAGE 12 December 31 if the trust is not already filing on this basis. On the first return with a December 31 year-end, attach a note to explain the situation. In the year of change, the taxation year may be less than, but not more than, 12 months. Filing dates You have to file the return, T3 and NR4 slips, and T3 and NR4 summaries no later than 90 days after the end of the trust's taxation year (see "Taxation year" on the previous page). You should also pay any balance owing no later than 90 days after the trust's taxation year end. Note You have to file T4, T4A, and T4A-NR slips by the last day of February after the calendar year in which the trust made the payment. If the information slips you need to complete the return are not available when the return is due, estimate the income. If, after you receive the slips, you find your estimate differs from the actual amounts, send the slips and a letter to us, requesting an adjustment to the trust's income. For more information, see "Reassessments" on page 13. If you mail the return first class, or if you use an equivalent delivery service, we consider the date of the postmark on the envelope to be the day you filed the return. If the required filing date falls on a Saturday, Sunday, or a statutory holiday, we will consider it filed on time if it is delivered on, or if the postmark on the envelope is, the first working day after the required filing date. For information on late-filing penalties and interest on unpaid taxes, see "Penalties and interest" on page 13. Deadline for distributing T3 slips - You must send T3 slips to the beneficiary's last known address no later than 90 days after the end of the trust's taxation year. If you have the information you need to complete the slips before that deadline, we encourage you to send them to the beneficiaries as early as possible. Final return If you are filing the final return for the trust, you have to file the return and pay any balance owing no later than 90 days after the trust's wind-up (discontinuation) date. You have to enter the wind-up date on page 1 of the return. If you wind up a testamentary trust, the taxation year will end on the date of the final distribution of the assets. If you wind up an inter vivos trust, you may want to file a final return before the end of the trust's taxation year. In either case, you should get a clearance certificate before you distribute the trust property. For more information, see "Clearance certificate" on page 14. \\ Where to file Where you file the return depends on the residency of the trust. Generally, we consider a trust to reside where the trustee, executor, administrator, liquidator, or other legal representative who manages the trust or controls the trust's assets lives. A trust is a resident of Canada or a non-resident of Canada. The residence of the trust will determine the appropriate tax rates. For more information, see Interpretation Bulletin IT-447, Residence of a Trust or Estate. Trusts resident in Canada Send the return to: Ottawa Technology Centre Canada Customs and Revenue Agency Ottawa ON K1A 1A2 If you have questions about resident trusts, contact us at 1-800-959-8281. For our addresses and other telephone numbers, visit our Web site or see the listings in the government section of your telephone book. Non-resident trusts and deemed resident trusts Send the return to: International Tax Services Office Canada Customs and Revenue Agency Ottawa ON K1A 1A8 If you have questions about non-resident trusts or deemed resident trusts, call the International Tax Services Office at one of the following numbers: When calling from: the Ottawa area 952-8753 other Canadian and U.S. locations 1-800-267-5177 outside Canada and U.S.* 613-952-8753 * We accept collect calls. \\ How to file You can use the following formats to file the return, the summary, and the related slips. Paper return, summary, and slips - You can use the forms that we print, or your own computer-printed (customized) forms. If you file more than 500 slips, see "Filing on magnetic media" below. If you design and issue your own customized forms, you have to get written approval from us. For more information, see Information Circular 97-2, Customized Forms. Do not staple the summary and slips to the T3 return. Filing on magnetic media - If the trust has a taxation year-end of December 31, or is a mutual fund trust with a taxation year-end of December 15, and you file more than 500 slips (the total number of T4, T4A, T4A-NR, T4RIF, T5, T5008, T4RSP, NR4, and T3 slips), you have to file the slips and summary on magnetic tape, cartridge, CD-ROM, or diskette. If you file 500 slips or less, and you use a computerized system to generate them, we encourage you to file the slips and summary on magnetic media. If you are a tax preparer, and you file a total of more than 500 slips (the total number of T4, T4A, T4A-NR, T4RIF, T5, T5008, T4RSP, NR4, and T3 slips), you also have to file using magnetic media. PAGE 13 If you are a mutual fund trust that files T3 slips on magnetic media, you can combine the income and capital gains from several funds onto one T3 slip for each unit holder. However, when you combine the slips you have to: - prepare the tape, cartridge, CD-ROM, or diskette of summary forms and slips, which you submit to the Canada Customs and Revenue Agency (CCRA) at the individual fund level; - mark clearly on the T3 slip the words "Combined information slip" under the recipient name and address and provide unit holders with statements that allow them to reconcile the amounts reported on the combined information slips; and - maintain an audit trail so the combined information slips can be verified if the CCRA audits these funds later. If you file on magnetic media, send us the tape, cartridge, CD-ROM, or diskette on or before the filing deadline. Do not send a paper copy of the summary or slips. For technical specifications, visit our Web site at www.ccra.gc.ca/magmedia. For more information about this method of filing, you can call us at 1-800- 665-5164. If you prefer, you can write to: Magnetic Media Processing Unit Ottawa Technology Centre Canada Customs and Revenue Agency Ottawa ON K1A 1A2 \\\ Note The magnetic media program is undergoing a redesign. In 2004, tapes, diskettes, and CD-ROMs will be accepted in the current format and the new XML format. Starting in 2005, only CD-ROMs in the new XML format will be accepted. \\\ \\ Penalties and interest Penalties If you do not file the trust's income tax return by the required date, we will charge a late-filing penalty on any unpaid tax. The penalty is 5% of the unpaid tax plus 1% of the unpaid tax for each full month that the return is late, to a maximum of 12 months. The late-filing penalty will be higher if we issued a demand to file the return, and we assessed a late-filing penalty for any of the three previous years' returns. In this case, the penalty is 10% of the unpaid tax, plus 2% of the unpaid tax for each full month that the return is late, to a maximum of 20 months. If you fail to report an amount on the return, we may charge you a penalty. If you do this more than once within a four-year period, you will have to pay an extra penalty. If you file an information return late, or do not distribute the related slips to the beneficiaries by the required date, you will be liable to a penalty. This penalty is $25 a day for each day they are late, from a minimum of $100 to a maximum of $2,500, for each failure to comply with this requirement. Under the Regulations, if you are filing more than 500 slips in a calendar year, you are required to file these in an electronic format. If you do not do this, you may be guilty of an offence. In addition to any other penalty, you may be liable to a maximum fine of $2,500 per slip. If you are convicted of not filing a return or slip as required, you are liable to a fine ranging from a minimum of $1,000 to a maximum of $25,000, or to a fine and imprisonment for a period of up to 12 months. You will be liable to a penalty if, due to culpable conduct, you prepare income tax or information returns, forms, or certificates on behalf of another person, and you make false statements or omissions. The penalty is the greater of $1,000 or 50% of the tax avoided or refunded as a result of the false information. You will also be liable to a penalty if, due to culpable conduct, you counsel others to file tax returns based on false or misleading information, or you disregard false information provided by your clients for tax purposes. Interest We pay compounded daily interest on a tax refund starting on the latest of: \\\ - the thirty-first day after the return is due; - the thirty-first day after the return is filed; or - the day after the overpayment arises. \\\ We charge interest on unpaid amounts and the total amount of penalties assessed. We calculate this interest, compounded daily, at a prescribed rate from the date the unpaid amount was due until the date of its payment. Cancelling or waiving penalties and interest We may cancel or waive all or a portion of the penalties and interest because of circumstances beyond your control. For more information, see Information Circular 92-2, Guidelines for the Cancellation and Waiver of Interest and Penalties. \\ After you file Processing times We can usually process a T3 return in four months. If you filed a return for the first year of a testamentary trust, and you chose a taxation year-end other than December 31, it may take longer to process the return. For more information, see "Taxation year" on page 11. Reassessments If you need to change a return after you send it to us, do not file another return for that taxation year. Send us a letter providing the details of the change. Make sure that you indicate the taxation year you want us to change, and attach any supporting documents. You should also include the trust's account number on the letter. PAGE 14 We can reassess your return, make additional assessments, or assess tax, interest, or penalties within: - three years (four years for mutual fund trusts) from the date we mailed your original Notice of Assessment or a notice that no tax was payable for the taxation year (this period is called the "normal reassessment period"). We consider the date appearing on the notice to be the date that we mailed it; or - six years (seven years for mutual fund trusts) from the date we mailed your original Notice of Assessment to allow or change a carryback of certain deductions, such as a loss or an unused investment tax credit. Your request should be postmarked before the end of the periods mentioned above for us to consider reassessing your return. In certain cases, we can reassess a testamentary trust as far back as 1985 to give you a refund or reduce the tax owing. For more information, see Information Circular 92-3, Guidelines for Refunds Beyond the Normal Three Year Period. We usually base our initial assessment on the income you report. Later, we may select the return for a more in-depth review or audit. We can also reassess a return at any time if: - you have made a misrepresentation because of neglect, carelessness, willful default, or fraud in either filing the return or supplying information required by the Act; or - you file Form T2029, Waiver in Respect of the Normal Reassessment Period, with your tax services office before the normal reassessment period expires. If you want to revoke a waiver you previously filed, file Form T652, Notice of Revocation of Waiver. The revocation will take effect six months after you file Form T652. Elections Under certain circumstances, we may allow you to make a late or amended election, or revoke an original election. This applies to the following elections that we discuss in this guide: - 164(6) election by a testamentary trust (see page 24); and - preferred beneficiary election (see page 36). A late, amended, or revoked election is subject to a penalty of $100 for each complete month from the due date of the election to the date of the request. The maximum penalty is $8,000. For more information, see Information Circular 92-1, Guidelines for Accepting Late, Amended or Revoked Elections. What records do you have to keep? You have to keep your books, records, and supporting documents in case we need to verify the income or loss you reported on the return. Generally, you must keep them for at least six years from the taxation year end to which they relate. However, you can request permission to dispose of them before the end of this period. For more information, see Information Circular 78-10, Books and Records Retention/Destruction. Clearance certificate You have to get a clearance certificate before distributing any property under your control. However, you can distribute property without a clearance certificate, as long as you keep sufficient property in the trust to pay any liability to us. By getting this certificate, you will avoid being personally liable for unpaid taxes, interest, and penalties. We cannot issue a clearance certificate until you: - have filed all the required returns and we have assessed them; and - have paid or secured all amounts owing. To ask for a clearance certificate, complete Form TX19, Asking for a Clearance Certificate. Send the completed Form TX19 to the Assistant Director, Verification and Enforcement Division, at your tax services office. Send the form after you have received a Notice of Assessment for each return. Do not include Form TX19 with a tax return. For more information, see Information Circular 82-6, Clearance Certificate. Chapter 2 - Completing the return The T3 Trust Income Tax and Information Return is a four-page form with related schedules. The following information will help you to complete the return. Transfers and loans of property We refer to a person who has loaned or transferred property as the "transferor." If a transferor, who is alive and resident in Canada, lends or transfers property to the trust for the benefit of: - the transferor's spouse or common-law partner, or a person who has since become the transferor's spouse or common-law partner; or - the transferor's related minor (such as a child, grandchild, sister, brother, niece, or nephew under the age of 18 at the end of the year), any income or loss from that property may have to be reported on the transferor's return. Note The transferor does not have to report the income of the trust if the related minor turns 18 before the end of the year. The transferor may also have to report taxable capital gains or allowable capital losses from the disposition of property loaned or transferred to a trust for the benefit of the transferor's spouse or common-law partner, or a person who has since become the transferor's spouse or common-law partner. If the property was sold to the trust at its fair market value, or if it was loaned to the trust at a prescribed rate of interest (which was paid within 30 days of the end of the taxation PAGE 15 year), any income or loss, or any taxable capital gain or allowable capital loss from that property is generally income of the trust. Do not issue a T3 slip to the transferor for this income. An individual can receive a low-interest or interest-free loan from a trust to which another individual transfers property. If the main reason for the loan was to reduce or avoid tax on the income from the property or substituted property, and the two individuals do not deal at arm's length, report the income from that loaned property or any property substituted for it on the trust's return. This rule also applies to an arm's length commercial loan that the individual uses to repay the original low-interest or interest-free loan. If the trust's terms are such that the transferred property may revert to the transferor, or if the transferor keeps a certain degree of control over the property, read "Exceptions and limits to income allocations" on page 33. If the income from loaned or transferred property is to be included on the transferor's return, you generally have to report it on the trust's return, and issue a T3 slip reporting the income as that of the transferor. For more information about transfers and loans of property, see the Capital Gains guide and the following Interpretation Bulletins: IT-286 Trusts - Amount Payable; IT-369 Attribution of Trust Income to Settlor, and its Special Release; IT-510 Transfers and Loans of Property Made After May 22, 1985 to a Related Minor; and IT-511 Interspousal and Certain Other Transfers and Loans of Property. Split income of a minor beneficiary If a trust (other than a mutual fund trust) allocates certain types of income to a beneficiary who had not attained the age of 17 before the taxation year, the beneficiary may have to pay a special tax. The special tax applies to: - taxable dividends allocated by the trust (other than dividends from shares of a class listed on a prescribed stock exchange and those of a mutual fund corporation); - shareholder benefits allocated by the trust (other than from ownership of shares of a class listed on a prescribed stock exchange); and - income allocated by the trust that came from income that a trust earned from providing services or property to a business operated by: - a person who is related to the beneficiary at any time in the year; - a corporation that has a specified shareholder who is related to the beneficiary at any time in the year; or - a professional corporation that has a shareholder who is related to the beneficiary at any time in the year. This does not apply if: - the income is from property inherited by the beneficiary and, during the year, he or she either studies full time in a post-secondary educational institution or qualifies for the disability amount; - the income is from property the beneficiary inherits from a parent; - the beneficiary was a non-resident of Canada at any time in the year; or - neither of the beneficiary's parents lived in Canada at any time in the year. Note The split income rules do not apply to property that has to be included in the transferor's income. How to report split income If the trust is allocating "split income" to a beneficiary, you have to inform the beneficiary that he or she may have to pay the special tax. Follow the instructions for completing Schedule 9 on page 37 and the T3 slip on page 46. Attach a statement to the T3 slip showing the amount of the beneficiary's share of the split income and the type of income. You should also advise the beneficiary in writing that he or she must complete Form T1206, Tax on Split Income - 2003. \\ Step 1 - Identification and other required information Complete all items on page 1 of the return. The assessment of the return may be delayed if you do not provide all the information. Name of trust - Use the same name on all returns and correspondence for the trust. The name of the trust will be modified to meet our requirements if it is longer than 60 characters. Mailing address - We may modify part of your address to meet Canada Post's requirements. Therefore, the address on any cheques or correspondence we send you may be different from the one you indicate on the trust's return. If you include the name and mailing address of a contact person, we will send any cheques or correspondence for the trust care of that person. If this is the case, your name will appear on the cheque or other correspondence only if space permits. Trust account number - If we have assigned an account number to the trust, enter it in this space. Include this number on all correspondence related to the trust. If this is the first return for the trust, we will issue an account number after we receive the return. Residence of trust - For information about the residence of the trust, see " Where to file" on page 12. PAGE 16 Yukon First Nations - If the trust resides on Yukon First Nations settlement land, answer "Yes," and enter the First Nations name and identification number in the spaces provided. The settlement lands and their numbers are: Champagne and Aishihik 11002 Little Salmon/Carmacks 11006 Nacho Nyak Dun 11007 Selkirk 11009 Ta'an Kwach'an 11010 Teslin Tlingit 11011 Tr'ondëk Hwëch'in 11012 Vuntut Gwitchin 11013 When you enter this information on the return, we will transfer part of any tax payable to the government of the First Nations settlement where the trust resides. Date of residency - Provide the date the trust became a resident of Canada or ceased to be a resident of Canada during the taxation year. Type of trust - It is important that you complete this section correctly because we use this information to determine the correct rate of tax. To identify the correct type of trust, see Chart 1 beginning on page 7. For testamentary trusts, use the "Other" box to identify trusts that are not spousal or common-law partner trusts. For inter vivos trusts, use the "Personal trust" box to identify personal trusts that are not spousal or common-law partner trusts or communal organizations. For RRSP, RRIF, or RESP trusts, use the "Other inter vivos" box and specify the type of trust on the line below. Date of death (testamentary trust) or Date trust was created (inter vivos trust) - Provide this information on each return filed. Non-profit organization - If the non-profit organization is incorporated, enter the business number. Deemed resident trust - Indicate if the trust is a deemed resident trust and provide the name of any other country in which the trust is considered to be resident. See the definition of deemed resident trust in Chart 1 on page 8. Reporting foreign income and property If the trust is resident in Canada, you have to report its income from all sources, both inside and outside Canada. If a resident trust or a deemed resident trust conducts business with a foreign affiliate, or has foreign holdings in excess of CAN$100,000, you may have to file special returns. Contact us for more information. Foreign property includes: - funds held outside Canada, including a foreign bank account; - tangible property located outside Canada, including real estate and equipment; - shares in foreign corporations; - an interest in a foreign trust, including a foreign mutual fund trust; - intangible property located outside Canada, such as rights to royalties, and a share of a Canadian corporation deposited with a foreign broker; and - a debt (such as a note, bond, or debenture) owed or issued by a non- resident. Foreign property does not include: - an interest in a registered retirement savings plan, registered retirement income fund, or registered pension plan that contains foreign property; - mutual funds registered in Canada that contain foreign investments; - property the trust used or held exclusively in the course of carrying on an active business; or - personal-use property. Other required information Answer all the questions at the top of page 2. The following information will help you answer certain questions. Question 1 - You have to answer this question for each personal trust. Question 2 - The sale of an income or capital interest in a trust is a change in ownership. Distributing estate property to beneficiaries is not a change in ownership for this question. Question 6 - For information about debts incurred in non-arm's length transactions, see Interpretation Bulletin IT-406, Tax Payable by an Inter Vivos Trust. Question 8 - The terms of the will, trust document, or court order determine the requirement to allocate income. Question 10 - If you answer "Yes," attach a statement giving all required information. See "Distribution of property to beneficiaries" on page 24. Question 11 - For a definition of "contribution," see the Glossary on page 5. Step 2 - Calculating total income: Lines 01 to 20 Line 01 - Taxable capital gains Calculate the taxable capital gains and allowable capital losses of the trust on Schedule 1. If the amount on line 21 of Schedule 1 is a taxable capital gain, enter it on line 01. If the amount on line 21 of Schedule 1 is a net capital loss, do not enter it on line 01. You cannot deduct the net capital loss from other income of the trust in the year, or allocate it to the beneficiaries (except as described under "Exceptions and limits to income allocations" on page 33). You can only use it to reduce the trust's taxable capital gains of other years. For more information on net capital losses, see Line 52 on page 21. PAGE 17 Note In the first taxation year of a testamentary trust, the legal representative can elect to apply any net capital loss against income on the deceased's final return. See "Testamentary trust elections" on page 24. If a trust sells capital property and realizes a gain, it is treated as a capital gain. If a trust sells eligible capital property and realizes a gain, it is treated as business, farming, or fishing income. If the eligible capital property is qualified farm property, the gain may qualify for the capital gains deduction. For more information, see "Capital gains deduction" on page 29 and the Farming Income or the Farming Income and the CAIS Program guides. \\ Line 02 - Pension income Enter amounts that the trust received from the following: - a registered pension plan (RPP); - a retirement compensation arrangement (RCA); - a deferred profit sharing plan (DPSP); - a superannuation plan; or - a foreign retirement arrangement. \\\ Note When an amount is considered to have been distributed to an estate from a foreign retirement arrangement according to the laws of the country where the arrangement was established, the payment is also deemed received by the estate for taxation purposes in Canada. In this case, you must include the amount, in Canadian funds, on line 02. \\\ Lump-sum payments If the trust received a lump-sum payment from an RPP or a DPSP that includes amounts accrued to December 31, 1971, you can elect to have this portion taxed in the trust at a lower rate. Do not include the amount on this line. Instead, enter "ITAR 40" on line 02 and on line 22 of Schedule 11, and we will calculate any federal, provincial, or territorial tax adjustment. For more information, see Interpretation Bulletin IT-281, Elections on Single Payments From a Deferred Profit-Sharing Plan. Attach to the return any information slips the trust received. If the information slip does not show the amount of lump-sum payment accrued to December 31, 1971, provide a statement from the payer indicating the amount. \\ Line 03 - Actual amount of dividends from taxable Canadian corporations Enter the actual amount of dividends received from taxable Canadian corporations from line 1 of Schedule 8. Attach all information slips received. For more information, see Line 1 on page 31. \\ Line 04 - Foreign investment income Enter all interest and other investment income from foreign sources from line 4 of Schedule 8. For more information, see the note at Line 05 below, and Lines 2 to 4 on page 32. \\ Line 05 - Other investment income Enter the amount from line 10 of Schedule 8. Include all interest and investment income from Canadian sources except dividends from taxable Canadian corporations reported on line 03. Attach all information slips received. For more information, see Lines 5 to 10 on page 32. Note In the first year of a testamentary trust, any interest income that has accrued to the person's date of death is reported on the deceased's final return. Any interest income accrued after the person's date of death is reported on the trust return. Lines 06, 07, 08, and 09 - Business, farming, fishing, and rental income Enter on the appropriate lines, the trust's gross and net income or loss from business, farming, fishing, and rentals. If the amount is a loss, report it in brackets. If the trust is a member of a partnership, enter the partnership's total gross income and the trust's share of the partnership's net income or loss. If a trust operates a business with a fiscal period end other than December 31, special rules may apply for calculating income. See the Reconciliation of Business Income for Tax Purposes guide to calculate the income to report. Note A testamentary trust is exempt from these special rules if the trust is the sole proprietor of the business, or if the business is owned by a partnership of testamentary trusts. You have to follow certain rules when reporting business, farming, fishing, and rental income. The following guides contain more information and the forms you need to calculate the trust's income: - Business and Professional Income (Form T2124, Statement of Business Activities); - Farming Income (Form T2042, Statement of Farming Activities); - Farming Income and the CAIS Program (Form T1163, Statement A - CAIS Program Account Information and Statement of Farming Activities for Individuals, or Form T1164, Statement B - CAIS Program Account Information and Statement of Farming Activities for Additional Operations); - Fishing Income (Form T2121, Statement of Fishing Activities); and - Rental Income (Form T776, Statement of Real Estate Rentals). Line 10 - NISA Fund 2 Use the calculation in this section to report all amounts received, and those deemed to have been received by the trust out of its NISA Fund 2. This fund is the portion of a farm producer's net income stabilization account (NISA) that comes from third-party sources, such as interest, bonuses, and government contributions. PAGE 18 The trust should receive an AGR-1 slip, Statement of Farm Support Payments, for all farm support programs from which it received payments of more than $100. These include programs administered by the federal, provincial, and municipal governments, and producer associations. A NISA Fund 2 can be transferred to a testamentary post-1971 spousal or common-law partner trust when the settlor dies. In this case, if the beneficiary spouse or common-law partner dies, the trustee has to report a deemed payment on the day the beneficiary spouse or common-law partner dies. The deemed payment is equal to the fund's balance at the end of the day of death. However, the trust and the legal representative of the beneficiary spouse or common-law partner can elect to report all or a portion of this deemed payment on the final return of the beneficiary spouse or common-law partner, rather than on the trust's return. See "NISA election," below. The trust has to report on line 10, the amount, if any, determined by the following calculation: +++ A minus (B minus C) where: A = the amount paid in the year out of the fund (or deemed to have been paid out of the fund, such as on the death of the beneficiary spouse or common-law partner) B = the total of all amounts previously deemed to have been paid out of the fund to the trust, or to the beneficiary spouse or common-law partner, or out of another person's fund on being transferred to the trust C = the total of all amounts previously applied to reduce income out of the fund +++ Make separate calculations for each amount either paid or deemed paid. NISA Fund 2 payments are taxable in the trust. They cannot be allocated to beneficiaries, except for: - amounts that relate to payments received by a testamentary spousal or common-law partner trust while the beneficiary spouse or common-law partner was still alive; or - amounts received by a communal organization. Use the space below line 10 to show any of the amounts on that line relating to payments received by the beneficiary spouse or common-law partner while he or she was, or is still, alive, or by a communal organization. NISA election The trust may want to make an election to report the deemed payment out of the NISA fund on the final return of the beneficiary spouse or common-law partner. To do so, submit the following information with the return on which the trust is reporting, or would have reported, the deemed disposition: - a statement making the election, stating the amount on which you are electing, signed by both the trustee and the legal representative of the estate of the beneficiary spouse or common-law partner; and - a statement, signed by the trustee, showing the calculation of the NISA Fund 2 and the amount being reported on the final return of the beneficiary spouse or common-law partner and the trust's return. Line 11 - Deemed realizations Enter the trust's income resulting from "21-year deemed realizations," from line 42 of Form T1055, Summary of Deemed Realizations. For more information, see "Deemed realization (disposition)" on page 29. \\ Line 19 - Other income Enter the total income the trust received in the taxation year that is not included elsewhere on the return or schedules, such as: - royalties; - commissions; - death benefits under the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP); - retiring allowances, unless this amount is reported by a beneficiary, or reported in the retired person's income for year of death as a right or thing (for more information, see Interpretation Bulletin IT-337, Retiring Allowances); and - certain employment-related income (for more information, see the Preparing Returns for Deceased Persons guide). Death benefit - Other than CPP or QPP A death benefit is an amount for a deceased person's employment service. It is shown in box 28 of a T4A slip, along with a footnote of 06 in box 38. If the amount is to be taxed in the trust according to the provisions of the trust document, you may be able to exclude up to $10,000 of the amount from the trust's income. If no one other than a trust received a death benefit, report the amount that is more than $10,000. Even if the trust did not receive all of the death benefits in one year, the total tax-free amount for all years cannot exceed $10,000. To find out what to report if anyone else received a death benefit for the same person, see Interpretation Bulletin IT-508, Death Benefits. Attach a copy of the T4A slip, or a statement from the deceased person's employer, that identifies the payment as a death benefit. Registered retirement savings plan (RRSP) A trust may be entitled to income earned by an unmatured RRSP after the death of the only or last annuitant. Usually, this income is shown on a T5 or T4RSP slip issued to the estate. You usually include this amount on line 19. For more information on taxable benefits from matured and unmatured RRSPs, see the RRSPs and Other Registered Plans for Retirement guide and Interpretation Bulletin IT-500, Registered Retirement Savings Plans - Death of an Annuitant. PAGE 19 Step 3 - Calculating net income: Lines 21 to 50 \\ Line 21 - Carrying charges and interest expenses Enter the total carrying charges from line 15 of Schedule 8. For more information, see Lines 11 to 15 on page 32. Lines 22 to 24 - Trustee fees Trustee, executor, and liquidator fees include: - fees paid for certain investment advice (for more information, see Interpretation Bulletin IT-238, Fees Paid to Investment Counsel); - fees incurred to gain or produce business or property income (deducted when you calculate the trust's business or property income); and - fees for administering the trust or looking after real property (for example, a residence) used by a lifetime beneficiary of a testamentary trust (because these fees are not incurred to earn business or property income, you cannot deduct them from the income of the trust). Whether or not these fees are deductible by the trust, they are still income to the recipient. For this reason, you have to include the total fees paid in the year on line 22. On line 23, enter the fees that were not incurred to earn income or that were already deducted elsewhere on the return. Trustee, executor, or liquidator fees paid to a person who acts in the capacity of an executor in the course of a business are part of that individual's business income. You should report these amounts on a T4A slip. Otherwise, the fee for acting as executor is income from an office or employment. If the fees paid are $500 or more, you have to prepare a T4 slip for that individual. The individual reports these amounts as income from an office, even if he or she does not receive a T4 slip. For more information, see the guide called Filing the T4 Slip and Summary Form. If the trust pays fees to a non-resident of Canada for services performed in Canada, complete a T4A-NR slip. For more information, see the Non-Resident Withholding Tax Guide. Line 25 - Allowable business investment losses (ABIL) If the trust had a business investment loss, you can deduct a part of that loss from income. We call the deductible portion an ABIL. It results from the actual or deemed disposition of certain capital properties. This can happen if the trust has disposed of, or is deemed to dispose of, one of the following to a person with whom it deals at arm's length: - a share or debt of a small business corporation; or - a bad debt owed to it by a small business corporation. For more information, see the Capital Gains guide. You can deduct the ABIL from the trust's other sources of income for the year. If the ABIL is more than the other sources of income for the year, the difference is a non-capital loss for the year. For more information about non- capital losses, see Line 51 on page 21. If you cannot deduct the ABIL as a non-capital loss within the allowed time frame (see Line 51 for details), the unapplied part becomes a net capital loss in the eighth year. You can then use it to reduce the trust's taxable capital gains in the eighth year or any following year. Reduction in business investment loss - If the trust designated part or all of its eligible taxable capital gains for the purpose of the capital gains deduction to a beneficiary in a previous year, you have to reduce the business investment loss for the current year. Use the chart on page 20 to calculate the reduction in business investment loss. If the trust had more than one business investment loss in the year, use this chart to calculate the total reduction. For more information, see Interpretation Bulletin IT-484, Business Investment Losses. PAGE 20 +++ Allowable Business Investment Loss and Reduction You have to adjust the amount of eligible taxable capital gains at lines 1 to 7, because they were included in income at different rates in previous years. Line 1: Total eligible taxable capital gains designated by the trust in 1985, 1986, and 1987 multiplied by 2 = ^ Line 2: Total eligible taxable capital gains designated by the trust in 1988 and 1989 - do not include eligible capital property on this line multiplied by 3 over 2 = ^ Line 3: Total deemed taxable capital gains from eligible capital property designated by the trust in 1988 and 1989 multiplied by 4 over 3 = ^ Line 4: Total eligible taxable capital gains designated by the trust in years after 1989 and before 2000 multiplied by 4 over 3 = ^ Line 5: Total eligible taxable capital gains designated by the trust in 2000 (see Note) ^ Line 6: Total eligible taxable capital gains designated by the trust in 2001 (see Note) ^ Line 7: Total eligible taxable capital gains designated by the trust after 2001 multiplied by 2 = ^ Line 8: Add lines 1 to 7 ^ Line 9: Total amount you used to reduce the trust's business investment losses in years after 1985 and before 2003 ^ Line 10: Line 8 minus line 9 = ^ Line 11: Business investment losses for the year before reducing the losses: ^ Line 12: Enter the amount from line 10 or line 11, whichever is less. This is the reduction for the year: ^ (Enter this amount on line 11 of Schedule 1.) Line 13: Business investment losses for the year: line 11 minus line 12 = ^ Line 14: Allowable business investment losses for the year: line 13 multiplied by one-half = ^ (Enter this amount on line 25 of the return.) Note: The fractions to be used at lines 5 and 6 are the inverse of the trust's inclusion rates for 2000 and 2001. For example, if the trust's inclusion rate was one-half, the inverse is 2. If the trust's inclusion rate was 3 over 4, the inverse is 4 over 3. If the trust's inclusion rate was 2 over 3, the inverse is 3 over 2. For 2000 (and 2001, if applicable), use the inclusion rate from line 16 of the 2000 Schedule 1. +++ Line 40 - Other deductions from total income Generally, you can deduct expenses if they were paid to earn income for the trust. Expenses include legal, accounting, and management fees. You can also deduct the following: - a resource allowance; and - fees paid for advice or assistance in objecting to or appealing an assessment or decision under the Act (although you have to reduce the claim by any award or reimbursement you received for such expenses). Do not deduct the following: - outlays and expenses that apply to the capital assets of the trust (see "Outlays and expenses" on page 26); - personal expenses of the beneficiaries or trustees, such as funeral expenses or probate fees; or - any amounts paid to beneficiaries. Resource allowance - Claim a resource allowance of up to 25% of the trust's resource profits on line 40. Generally, the resource profits of a trust are earned as production royalties. This includes royalties based on the amount or value of oil and gas production, and on which the recipient pays non- deductible Crown charges. If you are claiming a resource allowance for the trust, include a copy of your calculations and documents such as a T5 slip or a statement from the payer, to verify that the income qualifies for the resource allowance. Line 43 - Upkeep, maintenance, and taxes of a property used or occupied by a beneficiary You may have claimed expenses on the return that relate to the upkeep, maintenance, and taxes on a property used by a beneficiary. You may have claimed these expenses on a financial statement, such as a rental statement. Generally, if these amounts were paid out of the income of the trust, according to the trust document, the beneficiary is required to include these amounts in income in the year they were paid. Therefore, you have to report these benefits as income on the beneficiary's T3 slip, and you will deduct them again from the trust's income on line 47. To offset this "double- deduction" of the same expenses, you have to add these amounts back into the trust's income on line 43. Provide details of the amount entered on this line, including the nature and amount of each expense, and the line on the return or financial statement where you have claimed them. Line 44 - Value of other benefits to a beneficiary You may have paid benefits, such as amounts for personal or living expenses, from the trust to a beneficiary. The beneficiary has to include the value of these benefits in income in the year they were paid, unless the value: - is already included in computing the beneficiary's income for the year; or PAGE 21 - has been used to reduce the adjusted cost base of the beneficiary's interest in the trust. Enter on line 44 the amount of these benefits that were included as income on the beneficiary's T3 slip. Because you have to deduct the value of the benefits as income allocations and designations to beneficiaries on line 47, and the trust cannot deduct this amount, you have to add it back into the trust's income by including the amount on line 44. Provide details of the amount entered on this line, including the nature and amount of each benefit. \\ Lines A, B, and 47 - Total income allocations and designations to beneficiaries Generally, a trust receives income and pays it to the beneficiaries according to the terms of a will or trust document. We call this "allocating" income. In most cases, you enter the income on the T3 return in Step 2, then enter it on line A in Step 3, so the trust does not pay tax on the income. The beneficiary then has to report the income on his or her return. See Schedule 9 on page 33 for more information. There are some cases, however, where income that is allocated to a beneficiary may be taxed on the trust's return, instead of the beneficiary's. In other cases, income that is usually reported on the trust's return may instead be reported on the beneficiary's return. For more information, see "Exceptions and limits to income allocations" on page 33. Note Income allocated to a beneficiary that is not deductible should not be included on these lines, or reported on Schedule 9. Enter on line A the amounts paid or payable to beneficiaries (including any amount designated by a preferred beneficiary election) and subtract on line B the amounts claimed under subsections 104(13.1) and (13.2). Enter the result on line 47. Note Line 47 has to equal the total amounts entered on line 928 of Schedule 9. For more information, see "Income to be taxed in the trust" on page 35. Step 4 - Calculating taxable income: Lines 51 to 56 Losses of other years - If you are claiming a loss from other years, provide a continuity statement of the loss balances. Be sure the statement includes the year the loss was incurred, the amounts applied in previous years, and the balance remaining at the beginning of the current year. If you are providing a continuity statement for a net capital loss carryforward, use the table in Chart 5 of the Capital Gains guide. Line 51 - Non-capital losses of other years A non-capital loss could arise if the trust had a loss from business or property in a year, and it was more than the trust's income from all sources in that year. The unused portion of this loss can be carried back three years and forward seven years. If the trust has an unused non-capital loss from a previous year, you can use it to reduce taxable income for the current year. Enter this amount on line 51. For information on how to carry back an unused non-capital loss, see "Form T3A, Request for Loss Carryback by a Trust" on this page. Farming and fishing losses - If the trust had a farming or fishing loss from a previous year, see Line 54 on the next page. Line 52 - Net capital losses of other years Generally, if the trust's allowable capital losses are more than its taxable capital gains in a year, the difference is a net capital loss for that year. You can use the net capital loss to reduce the trust's taxable capital gains in any of the three preceding years or in any future year. Within certain limits, you can deduct all or a portion of the trust's net capital losses of other years that have not already been claimed. For more information, see the Capital Gains guide. Listed personal property losses - Losses on listed personal property (LPP) can be applied only against LPP gains. Claim the unused portion of an LPP loss from a previous year against a current-year LPP gain on line 8 of Schedule 1, or on line 8 of Form T1055, Summary of Deemed Realizations, if applicable. See "Lines 7 to 9 - Listed personal property" on page 28. The unused portion of an LPP loss can be carried back three years and forward seven years, and applied against LPP gains in those years. For information on how to carry back an unused net capital loss or an LPP loss, see the next section. Form T3A, Request for Loss Carryback by a Trust Use this form to carry an unused loss back to a previous year. You have to make your request on or before the due date of the return for the year in which the trust incurred the loss. You can file the form separately or attach it to the current year's return. If the loss is not deducted fully in a previous year, keep a schedule of the unused portion so you can deduct it in future years. Always apply the oldest loss within a class of losses first. For example, apply a 1998 non-capital loss before a 1999 non-capital loss. A non-capital loss carryback is used to reduce the taxable income of the trust in a previous year. If you allocated income to beneficiaries in the previous year, you cannot reduce the income allocated to increase the loss you can apply. PAGE 22 A net capital loss carryback is deductible only from the taxable capital gains retained in the trust. If taxable capital gains were previously designated to beneficiaries, you may be able to change the amount of net taxable capital gains designated as long as the total income allocated does not change. If you apply a net capital loss carryback, a non-capital loss may be increased or created if the loss was previously used to reduce the amount of taxable capital gains in the year of the carryback. For more information, see Interpretation Bulletins IT-381, Trusts - Capital Gains and Losses and the Flow-Through of Taxable Capital Gains to Beneficiaries, and IT-232, Losses - Their Deductibility in the Loss Year or in Other Years. Line 53 - Capital gains deduction for resident spousal or common-law partner trust only A spousal or common-law partner trust, if resident in Canada, can claim the unused portion of the beneficiary's capital gains deduction in the year that the beneficiary spouse or common-law partner dies. To calculate the deduction, complete Schedule 5 and attach it to the return. Enter on line 53 the amount from line 10 of Schedule 5. The deduction is not available to a pre-1972 spousal trust that filed Form T1015, Election by a Trust to Defer the Deemed Realization Day, or to a joint spousal or common-law partner trust or an alter ego trust. Line 54 - Other deductions to arrive at taxable income Enter other deductions, such as: - prior year losses, such as limited partnership losses, or farming or fishing losses (see the Note in this section); - the $2,000 deduction allowed to a non-profit organization reporting income from property (subsection 149(5) deduction); and - the amount of foreign income reported that is exempt from tax in Canada because of a tax treaty or convention (identify the exempt income amount, and the treaty or convention that applies). If the trust is claiming more than one loss, or if a claim needs more explanation, attach a note to the return providing the details. Note The unused portion of a farming or fishing loss incurred in a year can be carried back three years and forward ten years. There are restrictions on the amount of certain farm losses you can deduct each year. For information on restricted farm losses, see the Farming Income or the Farming Income and the CAIS Program guides. For information on how to carry back this type of loss, see "Form T3A, Request for Loss Carryback by a Trust" on page 21. Step 5 - Summary of tax and credits: Lines 81 to 100 \\ Line 82 - Provincial or territorial tax payable For information on which provincial or territorial form to use, see "Provincial and territorial income tax" on page 45. \\ Line 85 - Tax paid by instalments Enter the total instalment payments made by the trust. If the account number on the trust's receipt is not the same as the one on page 1 of the return, enter the account number from the receipt to the right of line 85. If you received a refund of all or part of an instalment due to hardship, do not include this amount at line 85. \\ Line 86 - Total tax deducted If tax was withheld on any income earned by the trust, enter the amount of tax withheld on line 86. If an information slip is not available, attach a statement from the issuer, indicating the income reported and the tax withheld. Do not allocate the tax that was withheld to the beneficiaries. Transfer to Quebec - If the trust was resident in Quebec and earned income outside that province, tax may have been withheld for a province or territory other than Quebec. You can transfer up to 40% of this amount to the province of Quebec. Subtract the transferred amount from total tax deducted and enter the result on line 86. Show this calculation, including the amount of the transfer, in the area provided below line 86. Line 89 - Capital gains refund This refund is available only to a mutual fund trust that has refundable capital gains tax on hand at the end of the year. To calculate the refund, complete Form T184, 2003 Capital Gains Refund for a Mutual Fund Trust. Line 90 - Part XII.2 tax credit If the trust is the beneficiary of another trust and received a T3 slip from that trust with an amount in box 38, enter that amount on line 90. Line 91 - Other credits Newfoundland and Labrador research and development tax credit You may be able to claim this credit if, in the year, the trust: - had a business with a permanent establishment in Newfoundland and Labrador; and - made eligible expenditures for scientific research and experimental development carried out in Newfoundland and Labrador. PAGE 23 In this case, complete Form T1129, Newfoundland and Labrador Research and Development Tax Credit (Individuals). You may designate some or all of this credit to beneficiaries of the trust. You do this by reducing the total credit by the amount designated to the beneficiaries. On line 91, enter the credit from Form T1129 minus the amount of credit designated to beneficiaries on Schedule 9. Attach Form T1129 to the return. Yukon mineral exploration tax credit You can claim this credit if the trust was a resident of the Yukon at the end of the year and it incurred qualified mineral exploration expenses in the Yukon. The expenses must be incurred for the purposes of determining the existence, location, extent, or quality of a mineral resource in the Yukon. On line 91, enter the tax credit from Form T1199, Yukon Mineral Exploration Tax Credit. Attach Form T1199 to the return. Yukon research and development tax credit You can claim this credit if the trust was a resident of the Yukon at the end of the year and it made eligible expenditures for scientific research and experimental development in the Yukon. Get the tax credit by filing Form T1232, Yukon Research and Development Tax Credit (Individuals). You may designate some or all of this credit to beneficiaries of the trust. You do this by reducing the total credit by the amount designated to the beneficiaries. On line 91, enter the amount from Form T1232 minus the amount of credit designated to beneficiaries on Schedule 9. Attach Form T1232 to the return. British Columbia mining exploration tax credit You can claim this refundable credit if the trust was a resident of British Columbia at the end of the year and it incurred qualified mining exploration expenses in this province in 2003. The expenses must be incurred for the purposes of determining the existence, location, extent, or quality of a mineral resource in British Columbia. On line 91, enter the tax credit from Form T88, British Columbia Mining Exploration Tax Credit (Individuals). Attach Form T88 to the return. \\ Line 94 - Refund or balance owing The refund or balance owing is the difference between the total taxes payable on line 84 and the total credits on line 93. A difference that is $2 or less does not have to be paid, and will not be refunded. \\ Line 95 - Amount enclosed Attach a cheque or money order payable to the Receiver General to the front of the return. Do not mail cash. To help us credit the correct account, write the trust's name and account number on the back of the cheque or money order. Enter on line 95 the amount of the payment. If you make a payment with a cheque that your financial institution does not honour (including a cheque on which you put a "stop payment"), we will charge you a fee. Generally, this fee will be $15 for each returned cheque, plus interest, if applicable. If payment is made through a bank account at a financial institution outside Canada, you can attach to the front of the return one of the following items which we can immediately negotiate: - an International Money Order drawn in Canadian dollars; - a bank draft in Canadian funds drawn on a Canadian bank (available at most foreign financial institutions); or - a cheque drawn in the currency of the country in which the financial institution is located. We cannot immediately negotiate a cheque drawn in Canadian funds on a financial institution outside of Canada, as it may take several weeks to collect the funds from the foreign financial institution. Therefore, you should remit your payment early to avoid or reduce any interest charges. Once we receive the funds from the foreign financial institution, we will update the account accordingly. Please note that due to the limits set by the banking community, we cannot accept cheques drawn in Canadian funds on a financial institution outside of Canada for less than $400 Canadian. \\ Line 100 - Refund code If the trust is entitled to a refund, enter one of the following codes in the refund code box: 0 if you want us to refund the credit; 1 if you want us to keep the credit for next year; or 2 if you want us to hold the credit and apply it to an expected assessment of an additional amount to be paid. Attach a letter providing details. We consider the credit to have been received on the date we assess your return. We will apply a credit of taxes to any outstanding balance. We will direct any amount left over according to the code you enter. If you do not enter a code, we will refund the credit. Name and address of person or company (other than trustee, executor, liquidator, or administrator) who prepared this return Complete this part if someone other than the trustee, executor, liquidator, or administrator prepared this return. \\ Certification The trustee, executor, liquidator, or administrator of the trust has to complete and sign this part. PAGE 24 Chapter 3 - Trust schedules and forms Schedule 1 - Dispositions of Capital Property If the trust disposed of capital property in the year, see the Capital Gains guide for the general rules regarding capital gains and losses. We explain the rules that relate to trusts in this section. Complete Schedule 1 and file it with the return if the trust had dispositions or deemed dispositions of capital property during the year. Transfer any taxable capital gains at line 21 of Schedule 1 to line 01 of the return. A disposition of capital property includes: - the sale of property; - the distribution or exchange of property; - the making of a gift; - a redemption of shares; - a debt settlement; - a theft; or - the destruction of property. \\\ Note We do not consider a disposition to have occurred if two corporations have amalgamated and there is no consideration for the redemption of shares. For more information, contact us. \\\ If the trust has deemed realizations resulting from the 21-year deemed realization rule, complete Form T1055, Summary of Deemed Realizations. For more information, see "Form T1055, Summary of Deemed Realizations" on page 29. Do not report these deemed realizations on Schedule 1. Note If the trust realized a capital gain from donating certain properties to a qualified donee (other than a private foundation), or made a gift of ecologically sensitive land to a qualified donee (other than a private foundation), complete Schedule 1A. For the definition of "qualified donee," see the Capital Gains guide. Distribution of property to beneficiaries If a personal trust distributes property to a beneficiary (to settle in whole or in part the beneficiary's capital interest in the trust), attach a statement to the return that includes the following information about the distributed property: - name and address of the recipient or recipients; - description of the property; - fair market value (FMV) on the day it is distributed; and - cost amount on the day it is distributed. For information regarding the distribution of property to a non-resident beneficiary, see "Capital dispositions - Rules for trusts" on page 25. Testamentary trust elections As the legal representative, you can elect to transfer certain estate losses to the deceased person's final T1 return. These elections are: - the 164(6) election, for capital or terminal losses; and - the 164(6.1) election, for deemed losses from employment (from employee security options (stock options) that expired, were disposed of, or were exercised). These elections apply only to the first taxation year of a deceased person's estate. The elections do not affect the return of the deceased person for any year before the year of death. To make either of these elections, attach a letter to the T3 return identifying the type of election. For the 164(6) election, the letter should contain the following: - the amount of any capital or terminal loss to be transferred; - a schedule with details of the capital loss, or a statement with details of the terminal loss; and - a statement of the amount that would have been the capital or terminal loss, had the transfer not occurred. File the election and an amended final T1 return by the later of: - the filing due date of the deceased person's T1 return that the legal representative is required to file or has elected to file; and - the filing due date for the estate's T3 return for its first taxation year. Clearly identify the amended final T1 return of the deceased person as a "164(6) election" or a "164(6.1) election." 164(6) election Generally, you can make this election for estate losses that occurred when the trust disposed of: - the estate's capital property resulting in more capital losses than capital gains; or - all the estate's depreciable property in a prescribed class, resulting in a terminal loss in that class at the end of the taxation year. The elected amount of a terminal loss cannot be more than the total of the trust's total non-capital loss and the farm loss calculated before the election. The trust cannot claim losses that you have elected to transfer to the deceased person's final return. However, you have to report the dispositions of the estate property on Schedule 1. If the total is a loss, enter the amount elected under subsection 164(6) on line 18. For more information, see Line 18 on page 29. PAGE 25 Note If the loss to be applied to the deceased person's final T1 return is known before that return is due to be filed, you can submit a request to apply the losses with the return. Clearly identify the return as a 164(6) election. Although the claim will not be allowed on the initial assessment of the T1 return, your request will be held until the T3 return is assessed and the claim can be verified. If the claim is accepted, the T1 return will be adjusted, and a Notice of Reassessment issued. 164(6.1) election You can make this election for employee security options (stock options) that expired, or were exercised or disposed of, within the first taxation year of the estate. You can elect to treat this reduction in value as a loss from employment for the year in which the person died. Use the following calculation to determine the amount that can be carried back to the deceased person's final return: +++ A minus (B + C) where: A = the deemed benefit for the option included on the deceased person's final return B = the amount by which the value of the option immediately before it expired, was exercised, or disposed of, is more than the amount the deceased person paid to acquire it C = the amount by which A is more than B, if a security option deduction (stock option deduction) for this option was claimed on the deceased person's final return, multiplied by one-half +++ If you make this election, reduce the trust's adjusted cost base of the option by A minus B, without considering C. Capital gains Generally, the taxable portion of a capital gain and the allowable portion of a capital loss is one-half. For gifts of certain capital property to a qualified donee (other than a private foundation), and for gifts of ecologically sensitive land to a qualified donee (other than a private foundation), the taxable portion of the capital gain is generally one-quarter. \\\ For any gift made after December 20, 2002, only the capital gain on the eligible amount of the gift will qualify for the lower inclusion rate. The capital gain on the remainder of the proceeds of disposition, referred to as an advantage, will be subject to the inclusion rate of one-half. \\\ For more information on gifts, see the pamphlet called Gifts and Income Tax and Schedule 1A. Capital dispositions - Rules for trusts A trust resident in Canada that distributes property, including certain taxable Canadian property, to a non-resident beneficiary in satisfaction of all or part of the beneficiary's capital interest in the trust, is deemed to have disposed of such property for proceeds equal to the property's fair market value (FMV) at that time. This rule does not apply to property that is a share of the capital stock of a non-resident owned investment corporation. A trust that ceases to be a resident of Canada is deemed to have disposed of all property, including certain taxable Canadian property, for proceeds equal to the property's FMV at that time, and reacquired the property, at the same value, immediately thereafter. These rules do not apply to the following properties, among others: - real property situated in Canada, Canadian resource property, or timber resource property; - property of a business carried on by the trust through a permanent establishment in Canada, including capital property, eligible capital property, and property described in the inventory of the business; - pension or other similar rights or interests; and - payments out of a NISA Fund 2. The trust or beneficiary can defer paying tax resulting from the deemed disposition by providing acceptable security. Contact us to arrange security. A trust that ceases to be a resident of Canada any time after 1995, and that owns property with a total FMV of more than $25,000 at that time, has to file, with its income tax return for that year, Form T1161, List of Properties by an Emigrant of Canada, listing each property the trust owned at that time. For the purposes of determining whether Form T1161 is required, property does not include: - money that is legal tender in Canada and all deposits of such money; - pension or other similar rights or interests; or - any item of personal-use property, with a FMV of less than $10,000 at the time the trust ceased to be a resident of Canada. Canadian cultural property For information on dispositions of Canadian cultural property, see "Selling or donating certified Canadian cultural property" in the Capital Gains guide, Interpretation Bulletin IT-407, Dispositions of Cultural Property to Designated Canadian Institutions, and the Gifts and Income Tax pamphlet. Proceeds of disposition This is usually the amount that the trust received or will receive for its property. In most cases, it refers to the sale price of the property. In certain situations, the proceeds of disposition are set by rules in the Act. Personal trust - When this kind of trust distributes property to a beneficiary, and there is a resulting disposition of all, or any part, of the beneficiary's capital interest in the trust, we generally consider the trust to have received proceeds of disposition equal to the "cost amount" of the property. The cost amount of a capital property (other than a depreciable property) is its adjusted cost base. We define "adjusted cost base" on page 26. PAGE 26 The cost amount of a depreciable property is calculated as follows: - If the property was the only property in the class, the cost amount is the undepreciated capital cost (UCC) of the class before the distribution. - If there is more than one property in the class, the cost amount of each property is as follows: +++ Capital cost of the property divided by Capital cost of all properties in the class that have not been previously disposed of multiplied by UCC of the class = Cost amount of the property +++ Where a trust distributes property to a beneficiary to settle in whole, or in part, the beneficiary's capital interest in the trust, you can elect not to have the above rule apply. You can do this if: - the trust was resident in Canada when it distributed the property; - the property is taxable Canadian property; or - the property is property of a business carried on by the trust through a permanent establishment in Canada, including capital property, eligible capital property, and property described in the inventory of the business, immediately before the time of distribution. The election has to be filed with the trust's return for the taxation year in which the property was distributed. If you file an election, we consider the trust, if resident in Canada, to have received proceeds of disposition equal to the fair market value (FMV) of the property at the time of distribution. Post-1971 spousal or common-law partner trust - When this kind of trust, whose beneficiary spouse or common-law partner is still alive, distributes property such as capital property, resource property, or land inventory to a person who is not the beneficiary spouse or common-law partner, we consider the trust to have received proceeds of disposition equal to the property's FMV. This also applies to: - a joint spousal or common-law partner trust that distributes property to a person who is not the settlor, beneficiary spouse or common-law partner and the settlor, beneficiary spouse or common-law partner is still alive; and - an alter ego trust that distributes property to a person who is not the settlor and the settlor is still alive. Trust other than a personal trust - When this kind of trust distributes property to a beneficiary and there is a resulting disposition of all, or any part, of the beneficiary's capital interest in the trust, we consider the trust to have received proceeds of disposition equal to the property's FMV. For more information on proceeds of disposition, see Chapter 2 of the Capital Gains guide. Adjusted cost base This is usually the cost of the property plus expenses incurred to obtain it. The adjusted cost base can differ from the original cost if changes have been made to the property between the time it was acquired and the time it was sold. For more information, see the Capital Gains guide and Interpretation Bulletin IT-456, Capital Property - Some Adjustments to Cost Base, and its Special Release. Property acquired before 1972 Before 1972, capital gains were not taxed. Therefore, if the trust sold property acquired before 1972, you have to use special rules when calculating the capital gain or capital loss to remove any capital gains accrued before 1972. These rules are found on Form T1105, Supplementary Schedule for Dispositions of Capital Property Acquired Before 1972, which you can also use to calculate the gain or loss from selling property the trust owned before 1972. Outlays and expenses These are amounts incurred to sell a capital property. You can deduct outlays and expenses from the proceeds of disposition when calculating the capital gain or capital loss. These types of expenses include finder's fees, commissions, broker's fees, legal fees, and advertising costs. In the case of depreciable property sold at a loss, these outlays and expenses reduce the proceeds from the sale to be credited to the class. Do not claim them as deductions from the trust's income. Lines 1 and 2 - Qualified small business corporation shares and qualified farm property Use these sections if you are filing a return for a personal trust reporting a capital gain or loss from the disposition of qualified small business corporation shares or qualified farm property. Do not report a loss the trust incurred in disposing shares of, or debts owing by, a small business corporation in an arm's length transaction. For information on these types of losses, see Line 25 on page 19. Capital gains from the disposition of qualified small business corporation shares or qualified farm property (defined below) may qualify for the capital gains deduction. If the spousal or common-law partner trust is claiming the deduction in the year that the beneficiary spouse or common-law partner died, use Schedules 3, 4, and 5 to calculate the deduction. If the trust is allocating and designating the eligible capital gains to a beneficiary, complete Schedules 3 and 4, and see "Footnotes for line 930" on page 38, and "How to complete the T3 slip" on page 46. A share in a small business corporation is considered to be a qualified small business corporation share if: - at the time of disposition, it was a share of the capital stock of a small business corporation and was owned by the trust, or a partnership related to the trust; PAGE 27 - throughout the 24 months before the disposition, only the personal trust, or a person or a partnership related to the personal trust, owned the share; and - throughout that part of the 24 months immediately before the disposition, while the personal trust or person or partnership related to the personal trust owned the share, it was the share of a Canadian-controlled private corporation (CCPC), and more than 50% of the fair market value of the assets of that corporation: - were used mainly in an active business carried on primarily in Canada by the CCPC, or by a related corporation; - were certain shares or debts of connected corporations; or - were a combination thereof. For the definition of a qualified small business corporation share, a person or a partnership is related to a personal trust in the following situations: - the person or partnership is a beneficiary of the personal trust; - the personal trust is a member of the partnership; \\\ - the person is a member of a partnership that is a member of another partnership and, therefore, is deemed to be a member of the second partnership; or \\\ - when the personal trust disposes of the shares, all the beneficiaries are related to the person from whom the personal trust acquired the shares. For more information, see "Qualified small business corporation shares" in the Capital Gains guide. Qualified farm property of a personal trust includes the following property the personal trust owns: - a share of the capital stock of a family farm corporation; - an interest in a family farm partnership; or - real property or eligible capital property used in carrying on the business of farming in Canada by: - an individual beneficiary (to whom the personal trust has designated taxable capital gains), or that beneficiary's spouse or common-law partner, child, or parent; or - a family farm corporation or family farm partnership of the personal trust or beneficiary, or the beneficiary's spouse or common-law partner, child, or parent. Note Special rules apply to the disposition of eligible capital property that is qualified farm property. For more information, see the chapter called "Eligible Capital Expenditures" in the Farming Income, or the Farming Income and the CAIS Program guides. Line 3 - Mutual fund units and other shares Use this section to report a capital gain or loss when the trust sells mutual fund units, shares, or securities that are not described in any other section of Schedule 1. Line 4 - Bonds, debentures, promissory notes, and other similar properties Use this section to report capital gains or losses when the trust sells these types of properties. The trust may receive Form T5008, Statement of Securities Transactions, or an account statement, showing details of the sale. Also use this section to report capital gains or losses when the trust sells options. For information on disposing of options to sell or buy shares, see Interpretation Bulletins IT-96, Options Granted by Corporations to Acquire Shares, Bonds, or Debentures and by Trusts to Acquire Trust Units, and IT-479, Transactions in Securities, and its Special Release. Line 5 - Real estate and depreciable property Use this section if the trust sold real estate or depreciable property. The trust cannot have a capital loss on the disposition of depreciable property. However, it can have a terminal loss under the capital cost allowance rules. For more information, see "Real estate, depreciable property and other properties" in the Capital Gains guide. Line 6 - Personal-use property Use this section if the trust disposed of property used primarily for the personal use or enjoyment of a beneficiary under the trust, or any person related to the beneficiary. Personal-use property includes personal residences, cottages, automobiles, and other personal and household effects. When you dispose of personal-use property, use the following rules to calculate the capital gain or loss: - if the adjusted cost base (ACB) of the property is less than $1,000, the ACB is considered to be $1,000; - if the proceeds of disposition of the property are less than $1,000, the proceeds are considered to be $1,000; and - if both the ACB and the proceeds of disposition are less than $1,000, there is no capital gain or loss. If the trust disposed of personal-use property that has an ACB or proceeds of disposition of more than $1,000, there may be a capital gain or loss. Report the capital gain on Schedule 1. However, if there is a capital loss, you usually cannot deduct the loss in the year. For more information, see "Personal-use property" in the Capital Gains guide and Interpretation Bulletin IT-332, Personal-Use Property. If the trust, or a person with whom the trust does not deal at arm's length, acquires personal-use property, including listed personal property (LPP), after February 27, 2000, in circumstances in which it is reasonable to conclude that the acquisition of the property relates to an arrangement, plan, or scheme promoted by another person or partnership and the property will be donated to a qualified donee, the above rules do not apply. In this case, you calculate the capital gain or loss using the actual ACB and proceeds of disposition. PAGE 28 Principal residence If a personal trust acquires a principal residence, it will usually be exempt from tax on any capital gain on the disposition or deemed disposition of that residence. To be exempt, the residence has to qualify and be designated by the trust as its principal residence. Usually a residence can be designated if a specified beneficiary, or that beneficiary's spouse or common-law partner, former spouse or common-law partner, or child lives in it. A specified beneficiary is one who had a beneficial interest in the trust, and who ordinarily lived, or has a spouse or common-law partner, former spouse or common-law partner, or child who lived, in the residence. A personal trust can only designate one property as a principal residence. Also, the specified beneficiary cannot designate any other property as a principal residence. For more information, see Form T1079, Designation of a Property as a Principal Residence by a Personal Trust. Make the trust's designation on Form T1079. You have to file this form with the return for the year in which the disposition or deemed disposition occurs. When a personal trust's principal residence is distributed to a beneficiary (to the spouse or common-law partner beneficiary if the personal trust is a post-1971 spousal or common-law partner trust, to the settlor, spouse or common-law partner beneficiary if the trust is a joint spousal or common-law partner trust, or to the settlor if the trust is an alter ego trust), the trust can elect to have a deemed disposition of the principal residence at its fair market value (FMV). Make this election on the trust's return for the year of distribution. You can then apply the principal residence exemption to any gain on the trust's deemed disposition. The beneficiary will acquire the property at its FMV. For more information, see Form T1079, and Interpretation Bulletin IT-120, Principal Residence. Lines 7 to 9 - Listed personal property Use this section to report dispositions of listed personal property (LPP), including all or part of any interest in, or any right to, the following properties: - prints, etchings, drawings, paintings, sculptures, or other similar works of art; - jewellery; - rare folios, rare manuscripts, and rare books; - stamps; and - coins. Because an LPP is a type of personal-use property, the capital gain or loss on the sale of the LPP item, or set of items, is calculated the same way as for personal-use property. For more information, see "Line 6 - Personal-use property" on page 27. Line 10 - Information slips Use this line to report the following amounts: - capital gains from box 21 of a T3 slip; - insurance segregated fund capital losses from box 37 of a T3 slip; - capital gains dividends from box 18 of a T5 slip; - capital gains (or losses) from box 34 of a T4PS slip; and - capital gains (or losses) from box 23 of a T5013 slip. If a slip identifies amounts for "qualified small business corporation shares" or "qualified farm property" in its footnote, details, or "other information" area, do not report these amounts on line 10. Instead, enter them at line 1 or 2, whichever is applicable. Line 11 - Capital losses from a reduction in business investment loss Report a capital loss from a reduction in business investment loss on line 11. For information on this type of loss, see "Reduction in business investment loss" on page 19. Line 12 - Capital gains reduction on flow-through entities If the trust filed Form 94-115, Election to Report a Capital Gain on Property Owned by a Personal Trust at the End of February 22, 1994, for its interest in, or shares of, a flow-through entity, it may have an exempt capital gains balance (ECGB). You can use the ECGB to reduce capital gains flowed to the trust by a flow-through entity, or capital gains it realizes on a disposition of its interest in, or shares of, the flow-through entity. Report a capital gains reduction on line 12. The reduction for each flow- through entity is limited to the ECGB for that entity. You cannot include the reduction on certain flow-through entities the trust donated. Instead, claim it on line 4 of Schedule 1A. For more information, see the Capital Gains guide. Note Any ECGB has to be used before 2005. Line 14 - Capital gains (losses) from reserves If the trust sold capital property, but did not receive the full payment at the time of the sale, you can claim a reserve for the unpaid amount. Generally, the minimum amount of the trust's capital gain you have to report each year is one fifth of the taxable capital gain. If you claimed a reserve in 2002, you have to bring it back into the trust's income in 2003. If any of the proceeds are to be paid after the end of the year, you may be able to claim a new reserve. If you are claiming a reserve on the trust's return, you have to complete Schedule 2. For more information on reserves, see the Capital Gains guide and Interpretation Bulletin IT-236, Reserves - Disposition of Capital Property. PAGE 29 Line 16 - Adjusted capital gains on gifts of certain capital property Enter the amount from line 6 of Schedule 1A. On line 17, enter the capital gains on gifts of property other than the gains included on line 6 of Schedule 1A. These are the total of any capital gains from gifts that are included in lines 1 to 7 minus any amount included on line 12 relating to those gifts. Line 18 - Total capital losses transferred under 164(6) Enter on this line the amount of capital losses you transferred under 164(6) to the deceased person's final T1 return. For more information, see "164(6) election" on page 24. Line 21 - Total taxable capital gains (or net capital losses) Transfer the total taxable capital gains to line 01 of the return. If the amount on this line is negative, you have a net capital loss. Do not enter it on line 01 of the return. See "Form T3A, Request for Loss Carryback by a Trust" on page 21. Note If the amount on line 21 is a capital gain and you calculate a net capital loss on Form T1055, Summary of Deemed Realizations, see the instructions on that form for a possible adjustment to line 21. Capital gains deduction When the beneficiary spouse or common-law partner dies, you may be able to reduce the trust's taxable capital gain. A post-1971 spousal or common-law partner trust reporting capital gains from the disposition of qualified small business corporation shares or qualified farm property can do this by claiming the unused portion of the beneficiary spouse's or common-law partner's capital gains deduction. A pre-1972 spousal trust reporting a deemed realization on the death of the beneficiary spouse can also claim the unused portion of the beneficiary spouse's capital gains deduction, but only if it did not make an election before 1999 on Form T1015, Election by a Trust to Defer the Deemed Realization Day. For 2001 and subsequent years, you generally only include one-half of the trust's taxable capital gains in its taxable income. The trust's cumulative capital gains deduction is $250,000. For more details, see the Capital Gains guide. Calculate the capital gains deduction on Schedule 5 and claim it on line 53 of the return. You will also have to complete Schedules 3 and 4. Note A joint spousal or common-law partner trust and an alter ego trust cannot claim a capital gains deduction. Form T1055, Summary of Deemed Realizations Deemed realization (disposition) On specified dates during the life or existence of a trust, the trust is deemed to have disposed of its capital property (other than exempt property and certain excluded property), land inventory, and Canadian and foreign resource properties. We refer to these dates as "deemed realization days." You have to report the resulting income, gains, or losses on the trust's return in the taxation year in which the dispositions are considered to have occurred. For more information about those specified dates, see "Deemed realization day" on the next page. In addition to the properties referred to above, if a post-1971 testamentary spousal or common-law partner trust holds a NISA Fund 2 that was transferred to it on the death of the settlor, report a deemed payment out of the fund on the day the beneficiary spouse or common-law partner dies. For more information, see Line 10 on page 17. Use Form T1055 to calculate the income, or capital gain or loss from deemed realizations. Note If the trust actually disposed of the property before the end of the taxation year, use Schedule 1 to report the actual disposition, unless the trust is a post-1971 spousal or common-law partner trust. If a deemed disposition occurs, the trust is considered to have: - disposed of its capital property (including depreciable property of a prescribed class), land inventory, and Canadian and foreign resource properties at the end of the deemed realization day, at the fair market value (FMV); and - reacquired them immediately after, at a cost equal to the same FMV. For depreciable property, the trust has to report both capital gains and recapture of capital cost allowance. Use Form T1055 to calculate: - the adjustments to line 21 of Schedule 1; - the amount of tax on which the trust can elect to defer payment; and - the amount of taxable and deemed taxable capital gains to which you can apply the trust's net capital losses of other years. For more information about the deemed cost of the property, see Interpretation Bulletins IT-370, Trusts - Capital Property Owned on December 31, 1971, and IT-132, Capital Property Owned on December 31, 1971 - Non-Arm's Length Transactions. PAGE 30 Deemed realization day This is the day we consider the trust to have disposed of its capital property, land inventory, and Canadian and foreign resource properties. Generally, it is one of the following: - for a spousal or common-law partner trust, the day the beneficiary spouse or common-law partner died; - for a joint spousal or common-law partner trust, the day the settlor or the beneficiary spouse or common-law partner died, whichever is later; - for an alter ego trust, the day the settlor died, unless the trust filed an election not to be considered an alter ego trust (see the definition of alter ego trust on page 7). If the trust has filed an election, the deemed realization date will be 21 years after the day the trust was created; \\\ - for a deemed resident trust, the day before it ceases to have any resident contributors with unlimited liability for the trust's tax liability; or \\\ - for other trusts, 21 years after the day the trust was created. Subsequent deemed realizations will occur every 21 years, on the anniversary of the day established above. For 2000 and subsequent years, the deemed realization day will be: - for a trust that distributes property after December 17, 1999, to a beneficiary in respect of the beneficiary's capital interest in the trust and it is reasonable to consider that the distribution was financed by a liability of the trust, and one of the reasons for incurring the liability was to avoid paying taxes because of the death of any individual, the day the property was distributed; - where an individual has transferred property (other than real property situated in Canada, Canadian resource property, or a timber resource property, property of a business carried on by the trust through a permanent establishment in Canada including capital property, eligible capital property, and property described in the inventory of the business, or certain pension or other similar rights or interests) after December 17, 1999, to a trust for the transferor's spouse or common-law partner, and it is reasonable to conclude that the property was transferred knowing that the individual planned to emigrate from Canada, the day the individual ceases to be a resident of Canada; or - for a trust to which property was transferred by an individual (other than a trust) where the transfer did not result in a change in beneficial ownership of that property and no person (other than the individual) has any absolute or contingent right as a beneficiary under the trust, the day on which the death of the individual occurs. Once a trust is considered to have disposed of the property in one of the above three situations, the 21-year deemed disposition rule does not apply. Exemption from the 21-year rule The following trusts are excluded from the 21-year deemed realization rules: A. an amateur athlete trust; B. an employee trust; C. a master trust; D. trusts governed by: - a deferred profit sharing plan; - an employee benefit plan; - an employees profit sharing plan; - a foreign retirement arrangement; - a registered education savings plan; - a registered pension plan; - a registered retirement income fund; - a registered retirement savings plan; or - a registered supplementary unemployment benefit plan; E. a related segregated fund trust; F. a retirement compensation arrangement (RCA) trust; G. a trust whose direct beneficiaries are one of the above-mentioned trusts; H. a trust governed by an eligible funeral arrangement or a cemetery care trust; I. a communal organization; J. a unit trust; K. a trust in which all interests have been permanently vested. This provision applies primarily to those commercial trusts (all trusts other than personal trusts) that do not qualify as unit trusts. It does not apply to: - a post-1971 spousal or common-law partner trust; - a joint spousal or common-law partner or an alter ego trust; - a trust that elected to postpone the deemed realization day; - a trust that elects on its return for the first taxation year ending after 1992 not to apply this provision; - after December 23, 1998, a trust resident in Canada that has non-resident beneficiaries, if the fair market value (FMV) of the non-resident beneficiaries' interests in the trust is more than 20% of the total FMV of all the interests in the trust; - a trust that distributed property after December 17, 1999, to a beneficiary in respect of the beneficiary's capital interest in the trust and it is reasonable to consider that the distribution was financed by a liability of the trust, and one of the reasons for incurring the liability was to avoid paying taxes because of the death of any individual; or PAGE 31 - a trust under the terms of which, all or part of any person's interest is to be terminated with reference to a period of time; and L. a trust (other than a trust described in A, B, C, D, and F above) where all or substantially all of the trust's property is held for the purpose of providing benefits to individuals from employment or former employment. Form T2223, Election, Under Subsection 159(6.1) of the Income Tax Act, by a Trust to Defer Payment of Income Tax The trust can elect to pay its income tax arising from the deemed realization rule in up to 10 annual instalments. Interest at the prescribed rate will apply. Make this election on Form T2223, and file it at your tax services office no later than the day the return is due for the taxation year the deemed realization occurs. For more information on this election, call us. Transfer of trust property to another trust If one trust (Trust A) transfers capital property (other than excluded property), land inventory, or resource property to another trust (Trust B), the deemed realization day of Trust B becomes the earliest of the following dates: - Trust A's deemed realization day that would have occurred if the transfer had not been made; - Trust B's deemed realization day that would have occurred if the transfer had not been made; or - the day of the transfer if the transfer to Trust A occurred on a rollover basis, for example, where Trust A is: - a spousal or common-law partner trust, and the beneficiary spouse or common- law partner is still alive at the time of the transfer; - a joint spousal or common-law partner trust, and the settlor or beneficiary spouse or common-law partner is still alive at the time of the transfer; or - an alter ego trust, and the settlor is still alive at the time of the transfer. This last condition will not apply when the transfer is between two trusts of the same type. For example, from one alter ego trust to another alter ego trust. +++ Summary of Options Available for Deemed Realization Under the 21-year Rule (subject to the provisions of the will or trust document) Options: Gains or losses from the deemed dispositions taxed in the trust Post-1971 spousal or common-law partner trust: Yes Pre-1972 spousal trust: Yes Joint spousal or common-law partner and alter ego trust: Yes Other trusts and spousal or common-law partner trusts 21 years after first deemed disposition: yes Options: Elect to defer tax (Form T2223) Post-1971 spousal or common-law partner trust: Yes Pre-1972 spousal trust: Yes Joint spousal or common-law partner and alter ego trust: Yes Other trusts and spousal or common-law partner trusts 21 years after first deemed disposition: yes Options: Claim capital gains deduction in the year the beneficiary spouse or common-law partner dies (Schedule 5) Post-1971 spousal or common-law partner trust: Yes Pre-1972 spousal trust: Yes (no, if the trust previously filed Form T1015) Joint spousal or common-law partner and alter ego trust: No Other trusts and spousal or common-law partner trusts 21 years after first deemed disposition: no Options: Designate capital gains (box 21 of the T3 slip) Post-1971 spousal or common-law partner trust: No Pre-1972 spousal trust: Yes Joint spousal or common-law partner and alter ego trust: No Other trusts and spousal or common-law partner trusts 21 years after first deemed disposition: yes Options: Preferred beneficiary election Post-1971 spousal or common-law partner trust: no, for the date the spouse or common-law partner died (yes, for the subsequent dispositions) Pre-1972 spousal trust: no, for the date the spouse died (yes, for the subsequent dispositions) Joint spousal or common-law partner and alter ego trust: no Other trusts and spousal or common-law partner trusts 21 years after first deemed disposition: yes +++ \\ Schedule 8 - Investment Income, Carrying Charges, and Gross-up Amount of Dividends Retained by the Trust Line 1 - Actual amount of dividends from taxable Canadian corporations Attach a statement listing the actual amount of dividends the trust received from taxable Canadian corporations. These amounts are shown in box 23 on a T3 slip and in box 10 on a T5 slip issued to the trust. In this statement, include actual and deemed taxable dividends. Do not include non-taxable dividends, as explained at Lines 5 to 10 on the next page, or capital gains dividends that you report on line 10 of Schedule 1. We consider dividends credited to the trust's account by a financial institution to have been received by the trust, even if the trust did not receive a T3 or a T5 slip. PAGE 32 The grossed-up amount of taxable dividends received from taxable Canadian corporations qualifies for the dividend tax credit. This may reduce the trust's tax payable. If the trust designated the taxable dividends to individual beneficiaries, the tax payable by the beneficiaries may be reduced. Lines 2 to 4 - Foreign investment income Report investment income from foreign sources in Canadian dollars. Calculate how much to report by multiplying the foreign income by the exchange rate in effect on the day that the trust received the income. If the amount was paid at various times throughout the year, contact us to get the applicable rate. Report the full amount of the foreign income. Do not reduce it by the tax withheld by foreign authorities. Lines 5 to 10 - Other investment income Report bond interest, bank interest, mortgage interest, and other dividends (including dividends under a dividend rental arrangement). We consider interest and dividends credited to the trust's account by a financial institution to have been received by the trust. Report interest on tax refunds received in the year on line 9. Do not include the following: - dividends the trust received from taxable Canadian corporations reported on line 1; - capital gains dividends reported on line 10 of Schedule 1; and - non-taxable dividends discussed in the next section. For more information on the method of reporting interest and other investment income, see the General Income Tax and Benefit Guide and Interpretation Bulletin IT-396, Interest Income. Non-taxable dividends received by a trust If the trust received a non-taxable dividend, do not include it in the trust's income. An example of a non-taxable dividend is a tax-free dividend that a Canadian private corporation pays from its capital dividend account. Certain non-taxable dividends that the trust received, other than dividends paid out of the capital dividend account, may reduce the adjusted cost base of the shares on which the dividends were paid. Make this adjustment when calculating a capital gain or loss if the trust later disposes of the shares. If the trust pays out non-taxable dividends to its beneficiaries, inform the beneficiaries that they should not include these dividends in income. You also have to file a statement with the return containing the following information: - the name of the payer corporation; and - the names of the beneficiaries, and the amount of non-taxable dividends that each beneficiary received. Lines 11 to 15 - Carrying charges and interest expenses Carrying charges and interest expenses include: - interest on money borrowed to earn investment income; - fees for the management or safe custody of investments; - safety deposit box charges; - accounting fees for recording investment income; and - investment counsel fees. Attach a statement to the return, listing the types and amounts of carrying charges that the trust claimed. If the trust is claiming interest on money borrowed, provide the following details: - the name of the lender; - the date and the amount of the loan; - the interest rate; - the terms of repayment; and - the balance of the loan at the end of the taxation year. If the trust has carrying charges for Canadian and foreign investment income, identify them separately, according to the percentage that applies to each investment. Do not include trustee fees paid by the trust or brokerage fees or commissions paid by the trust to buy or sell securities. If the trust paid these expenses to purchase a security, they are part of its cost. If the trust paid them to sell a security, claim them as "Outlays and expenses (from dispositions)" in column 4 of Schedule 1. You can deduct interest expenses on a life insurance policy loan if the trust used the proceeds of the loan to earn income. If the trust elects to add the interest expense to the adjusted cost base of the policy, you cannot deduct it on line 21 of the return. If the trust is claiming interest paid on a policy loan during the year, the insurer has to complete Form T2210, Verification of Policy Loan Interest by the Insurer, no later than 90 days after the trust's taxation year-end. For more information, see Interpretation Bulletin IT-355, Interest on Loans to Buy Life Insurance Policies and Annuity Contracts, and Interest on Policy Loans. Lines 16 to 21 - Calculating the gross-up amount of dividends retained or not designated by the trust Use this section to calculate the gross-up amount of actual dividends from taxable Canadian corporations included on line 1 and that the trust retained. The gross-up rate for dividends received in the year is 25% of the dividends received. Notes The gross-up does not apply to taxable Canadian dividends received by the trust if they are allocated to a non-resident beneficiary. Enter dividends allocated, but not designated, to a non-resident beneficiary on line 19. PAGE 33 Line 16 - Total dividends reported before applying expenses Enter the actual amount of dividends from taxable Canadian corporations from line 1. Line 17 - Dividends designated to beneficiaries Enter the amount of net dividends, after related expenses, that you designated to beneficiaries from line 923, Part A of Schedule 9. If you have allocated dividends by including them in the amount on line 926 of Schedule 9, the dividends are not designated. Therefore, do not include them on line 17. Line 19 - Dividends allocated, but not designated, to non-resident beneficiaries Enter the amount of net dividends, after related expenses, included in Column 2, line 926 of Schedule 9. If the dividends have been allocated to non- resident beneficiaries on line 923, do not include them on line 19. Line 21 - Gross-up amount of dividends retained or not designated by the trust Multiply the amount on line 20 by 25% to calculate the amount to enter on line 21. You have to apply the gross-up rate to actual dividends that have been retained in the trust, or allocated but not designated to beneficiaries, before you deduct the related expenses. Enter this amount on line 49 of the return, and: - in the calculation area for line 24 of Schedule 11; and - on line 19 of Schedule 12, if applicable. Claim the carrying charges that relate to dividends on line 14 of Schedule 8. For more information, see Interpretation Bulletin IT-524, Trusts - Flow- Through of Taxable Dividends to a Beneficiary - After 1987. \\ Schedule 9 - Income Allocations and Designations to Beneficiaries Complete this schedule if the trust is allocating income to its beneficiaries. You also have to complete T3 slips and a T3 Summary if you are allocating income to resident beneficiaries, or NR4 slips and an NR4 Summary if you are allocating income to non-resident beneficiaries. \\ Allocations and designations Generally, you allocate income to the trust's beneficiaries according to the terms of the will or trust document. Depending on the type of income allocated, you may then designate part or all of the allocated amount. When you designate an amount to a beneficiary, the type of income keeps its identity. This may allow the beneficiary to take advantage of a deduction or credit that applies to that income (such as the capital gains deduction or the dividend tax credit). See the Glossary for a definition of the terms "allocate, allocation," and "designate, designation." You can choose to designate the following income amounts to a beneficiary: - net taxable capital gains; - certain lump-sum pension income; - dividends from taxable Canadian corporations; - foreign business income; - foreign non-business income; - pension income that qualifies for the pension income amount; - pension income that qualifies for acquiring an eligible annuity for a minor beneficiary; and - retiring allowances that qualify for a transfer to a registered pension plan (RPP) or a registered retirement savings plan (RRSP). Note An insurance segregated fund trust has to designate all its capital gains and losses to its beneficiaries. Use Part B of Schedule 9 to report designated amounts. This includes amounts such as foreign income tax paid, a retiring allowance qualifying for transfer to an RPP and an RRSP, a Part XII.2 tax credit, and other tax credits that flow through to the beneficiary. Note Income allocated to a beneficiary that is not deductible should not be reported on Schedule 9. For more information, see the following Interpretation Bulletins: IT-342, Trusts - Income Payable to Beneficiaries; IT-381, Trusts - Capital Gains and Losses and the Flow-Through of Taxable Capital Gains to Beneficiaries; and IT-524, Trusts - Flow-Through of Taxable Dividends to a Beneficiary - After 1987. Exceptions and limits to income allocations Generally, trust income has to be allocated to beneficiaries, or taxed in the trust, according to the provisions of the will or trust document, with the following exceptions and limits: - A post-1971 spousal or common-law partner trust, joint spousal or common-law partner trust, or alter ego trust cannot deduct: - any income realized from deemed dispositions of property of the trust, and then distributed to someone other than: - for a post-1971 spousal or common-law partner trust, the beneficiary spouse or common-law partner; - for a joint spousal or common-law partner trust, the settlor or the beneficiary spouse or common-law partner, while the settlor or beneficiary spouse or common-law partner is still alive; or - for an alter ego trust, the settlor. PAGE 34 - any income realized from deemed dispositions of capital property (other than exempt or excluded property), land inventory of the trust's business, and Canadian and foreign resource property that arose on the death of: - for a post-1971 spousal or common-law partner trust, the beneficiary spouse or common-law partner; - for a joint spousal or common-law partner trust, the settlor or the beneficiary spouse or common-law partner, whichever is later; or - for an alter ego trust, the settlor. - the deemed payment from NISA Fund 2 that arose on the death of a beneficiary spouse or common-law partner. - The trust cannot deduct income from payments out of NISA Fund 2, unless: - the trust is a testamentary spousal or common-law partner trust and this income was received while the beneficiary spouse or common-law partner was alive; or - the trust is a communal organization. - A trust cannot deduct amounts payable in a taxation year to anyone except: - for a trust that was a post-1971 spousal trust on December 20, 1991, or a spousal or common-law partner trust created after December 20, 1991, the beneficiary spouse or common-law partner, while the beneficiary spouse or common-law partner is alive; - for a joint spousal or common-law partner trust, the settlor or the beneficiary spouse or common-law partner while either one of them is alive; or - for an alter ego trust, the settlor while the settlor is alive. - Certain inter vivos trusts created after 1934 may have property (or property substituted for it) that: - may revert to the contributor; - may be distributed to beneficiaries determined by the contributor at a time after the trust was created; or - may only be disposed of with the consent of, or at the direction of, the contributor while the contributor is alive or exists. We consider any income, including taxable capital gains and allowable capital losses from that property or the substituted property, to belong to the contributor during the contributor's life or existence while a resident of Canada. In such a case, the trust must still report the income on the trust's T3 return and issue a T3 slip reporting the income as that of the contributor of the property. For more information about these inter vivos trusts and these attribution rules, see Interpretation Bulletin IT-369, Attribution of Trust Income to Settlor, and its Special Release. - For 2000 and subsequent years, if the trust is: - a post-1971 spousal or common-law partner trust, and the beneficiary spouse or common-law partner died in the year; - a joint spousal or common-law partner trust, and the survivor of the settlor or the beneficiary spouse or common-law partner died in the year; or - an alter ego trust, and the settlor died in the year, you cannot deduct an amount in respect of income accrued up to the deemed realization day caused by the death but that is payable only after the death. For more information, call us. - A trust cannot allocate capital losses and non-capital losses to beneficiaries of a trust except: - capital losses, if it is an insurance-related segregated fund trust; and - losses of revocable trusts and from blind trusts. Report these losses in brackets in the appropriate box on a separate T3 slip for the beneficiary. Clearly indicate the type of loss in the footnote area below box 41 on the T3 slip. - We consider income that was not paid or payable to a beneficiary to be allocated to a beneficiary if he or she has a vested right to its income, and: - the trust is resident in Canada throughout the year; - the beneficiary is under 21 years of age at the end of the year; and - the beneficiary's right to income is vested by the end of the year, it did not become vested due to the exercise or non-exercise of a discretionary power by any person, and it is not subject to any future condition other than the condition that the beneficiary survive to an age of not more than 40 years. - The amount of income that can be allocated to a beneficiary may be limited if: - a beneficiary's share of the income of the trust is less than his or her capital interest in the trust; or - the beneficiary is a designated beneficiary as described on page 40 and the trust was not resident in Canada throughout the taxation year. - When a trust resident in Canada disposes of property to a beneficiary at fair market value and there is a capital gain, the trust can elect to treat the income as taxable in the trust. That is, the taxable capital gain will not be considered payable to the beneficiary if: - the trust was resident in Canada when it distributed the property; and - the trust filed an election with its return for the year, or a preceding taxation year, in which the property was distributed. The election can be made for distributions to all beneficiaries or only for distributions to non-resident beneficiaries. If a trust has filed such an election in the current year or any preceding year, calculate the trust's PAGE 35 income available for allocation to a beneficiary without taking into consideration any gains realized on the distribution of property to beneficiaries covered by the election while the trust was resident in Canada. \\\ - For taxation years beginning after 2002, a deemed resident trust is limited in the amounts that it can allocate to non-resident beneficiaries. For more information, contact the International Tax Services Office at the numbers listed on page 12. \\\ \\ Income to be taxed in the trust You can choose to report income on the trust return, rather than report it in the hands of the beneficiaries, as long as the trust is: - resident in Canada throughout the year; - not exempt from tax; and - not a trust type A to I and L described in "Exemption from the 21-year rule" on page 30. This applies to income paid or payable to beneficiaries. The choice of reporting income on the trust's return is called a designation under subsection 104(13.1). You make this choice by indicating on line B of the return for the year that a designation is being made under subsection 104(13.1). For example, you can use this designation in a year when a trust has taxable income and a non-capital loss carryforward. Once you make this choice, you cannot deduct on line 47 the income designated in the election. Once you make the choice, you have to make it for each beneficiary. It reduces a beneficiary's income from the trust by that beneficiary's proportionate share of the income reported on the trust's return. We show you how to calculate the proportionate share in the following section. You can make a similar designation under subsection 104(13.2) if taxable capital gains are included in the income reported on the trust's return. This will reduce the beneficiary's taxable capital gains from the trust by that beneficiary's proportionate share of taxable capital gains reported on the trust's return. For example, by making the subsection 104(13.2) designation, you can use the trust's non-capital loss or net capital loss carryforward to absorb the current-year taxable capital gain. Generally, amounts designated under subsections 104(13.1) and 104(13.2) will reduce the adjusted cost base of a beneficiary's capital interest in the trust unless the interest was acquired for no consideration and the trust is a personal trust. If you choose to designate any portion of the beneficiary's income to be reported on the trust return: - enter the amount on line B of the return; and - attach a statement to the return showing the income you are designating and the amounts you are designating for each beneficiary. For more information, see Interpretation Bulletins IT-342, Trusts - Income Payable to Beneficiaries, and IT-381, Trusts - Capital Gains and Losses and the Flow-Through of Taxable Capital Gains to Beneficiaries. Proportionate share formulas Use the following formulas to calculate designations under subsections 104(13.1) and 104(13.2). You have to apply these formulas to each beneficiary. A trust cannot use these designations to tax one beneficiary's share in the trust and allocate another share to a beneficiary unless the trust agreement entitles one beneficiary to the trust's income and another beneficiary to the trust's capital. Subsection 104(13.1) +++ A divided by B multiplied by C where: A = beneficiary's share of trust income (calculated without reference to the Act) B = total of amount A for all beneficiaries C = trust income designated under subsection 104(13.1) +++ Subsection 104(13.2) +++ A divided by B multiplied by C where: A = beneficiary's share of the taxable capital gains of the trust calculated under income tax rules B = total of amount A for all beneficiaries C = net taxable capital gains designated under subsection 104(13.2) +++ Example A trust's income is $9,000, comprised of investment income of $6,000 and taxable capital gains of $3,000. Both are shared equally between the trust's two beneficiaries, Bonnie and Ian. The trust has $6,000 in losses from prior years to apply: a non-capital loss of $5,000 and a net capital loss of $1,000. Therefore, the trustee decides to report $6,000 of income on the trust return by designating $5,000 under subsection 104(13.1) and $1,000 of taxable capital gains under subsection 104(13.2), against which the losses are applied. Determine the amount designated under subsection 104(13.1) for Bonnie as follows: +++ A divided by B multiplied by C $3,000 divided by $6,000 multiplied by $5,000 = $2,500 +++ Therefore, the amount designated for Bonnie is $2,500. Because Ian shares equally, his calculation is the same. Page 36 Determine the amount designated under subsection 104(13.2) for Bonnie as follows: +++ A divided by B multiplied by C $1,500 divided by $3,000 multiplied by $1,000 = $500 +++ Therefore, the amount designated for Bonnie is $500. Because Ian shares equally, his calculation is the same. Preferred beneficiary election A trust and a preferred beneficiary can jointly elect, in the year, to include in a preferred beneficiary's income for that year, all or part of the trust's accumulating income for the year. You can deduct the elected amount from the trust's income, up to the amount of the accumulating income. The elected amount for a preferred beneficiary must not be more than the allocable amount of the trust's total accumulating income. See the definition of "preferred beneficiary" on page 6. Trusts that are exempt from the 21-year rule cannot make a preferred beneficiary election. We list these trusts under "Exemption from the 21-year rule" on page 30. You can only make the election if: - for a spousal or common-law partner trust, the beneficiary spouse or common- law partner is still alive; - for a joint spousal or common-law partner trust, either the settlor or the beneficiary spouse or common-law partner is still alive; and - for an alter ego trust, the settlor is still alive. A trust's accumulating income for the year is generally its income for the year after deductions, but without regard to amounts allocated under preferred beneficiary elections. Accumulating income does not include the income from the deemed realization of capital property, land inventory, or resource property on the death of: - the beneficiary spouse or common-law partner, for a spousal or common-law partner trust; - the settlor or the beneficiary spouse or common-law partner, whichever is later, for a joint spousal or common-law partner trust; and - the settlor, for an alter ego trust. Accumulating income also does not include income arising from the deemed disposition of property to a beneficiary that results in a disposition of all or part of the beneficiary's capital interests in the trust, when the property is distributed to a beneficiary other than: - the beneficiary spouse or common-law partner for a post-1971 spousal or common-law partner trust; - the settlor or the beneficiary spouse or common-law partner, for a joint spousal or common-law partner trust; and - the settlor, for an alter ego trust, if the beneficiary spouse or common-law partner or settlor is alive on the deemed date of distribution. Accumulating income of a trust does not include amounts paid or deemed to have been paid from NISA Fund 2. However, a preferred beneficiary election can include these amounts paid to a testamentary spousal or common-law partner trust while the beneficiary spouse or common-law partner was still alive. Note Accumulating income is calculated as if you have deducted the maximum amount of income that became payable in the year to the beneficiary. You can make a preferred beneficiary election for a taxation year by filing the following: - a statement making the election for the year, stating the part of the accumulating income on which you are making the election, and signed by both the preferred beneficiary (or guardian) and the trustee with the authority to make the election; and - a statement signed by the trustee showing the calculation of the amount of the beneficiary's share of the accumulating income, and indicating the beneficiary's social insurance number, his or her relationship to the settlor of the trust, and whether: - the beneficiary is claiming a disability amount; - a supporting individual is claiming a disability amount for that beneficiary (if yes, provide the name, address, and social insurance number of the supporting individual); or - the beneficiary is 18 or older, and in the beneficiary's taxation year which ends in the trust's taxation year, another individual can claim an amount for an infirm dependant age 18 or older for that beneficiary, or could claim the amount if the beneficiary's income is calculated before including the income from the preferred beneficiary election (if this is the case, provide a statement from the doctor, optometrist, audiologist, occupational therapist, speech-language pathologist, or psychologist confirming the beneficiary's infirmity in the first year the claim is made). File the election, with the return or separately, no later than 90 days after the end of the trust's taxation year for which the election was made. For a preferred beneficiary election to be valid, you have to file it on time. If you file the election late, we will tax the accumulating income in the trust. For more information regarding late-filed or amended elections, see "Elections" on page 14. If you are making a preferred beneficiary election, see Interpretation Bulletin IT-394, Preferred Beneficiary Election. PAGE 37 \\ How to complete Schedule 9 Report allocated income using the columns provided: Column 1 - income paid or payable to resident beneficiaries; Column 2 - income paid or payable to non-resident beneficiaries; and Column 3 - income allocated by a preferred beneficiary election. See the appropriate column heading in the following sections for more information. Any amounts allocated to a beneficiary on lines 921 to 926 are generally deducted from the trust's income. If you claimed expenses on line 41 of the return, you have to deduct them from specific types of income before the trust can allocate the income to the beneficiaries. You have to apportion the expenses that relate to more than one source of income to the applicable sources of income. If you allocate all of the income to the beneficiaries, we will allow an alternative apportionment of expenses to provide the maximum flow-through to a beneficiary of the dividend tax credit. For more information, and the conditions that the trust has to meet before we can accept this alternative apportionment of expenses, see Interpretation Bulletin IT-524, Trusts - Flow-Through of Taxable Dividends to a Beneficiary - After 1987. \\ Column 1 - Resident Include in this column, allocations and designations of income paid or payable to resident beneficiaries, as well as any taxable benefits to be allocated to these beneficiaries. If the income is allocated, but no amounts are designated, enter the total amount on line 926. If you are designating the income, enter the amounts on the appropriate lines. In addition, use Part B for other amounts you are designating to the beneficiaries. For more information, see: - "Allocations and designations" on page 33; - Interpretation Bulletin IT-286, Trusts - Amount Payable; and - Interpretation Bulletin IT-342, Trusts - Income Payable to Beneficiaries. \\ Column 2 - Non-resident Include in this column, allocations and designations of income paid or payable to non-resident beneficiaries. If the income is allocated, but no amounts are designated, enter the total amount on line 926. Report the total of the amounts in column 2 as estate or trust income on an NR4 slip, not on a T3 slip. Most amounts paid or payable to non-resident beneficiaries are subject to a Part XIII withholding tax. See Lines 24 to 26 on page 41. Enter the total of column 2 on line 15 of Schedule 10. If you allocate certain income to non-resident beneficiaries, the trust may also be subject to Part XII.2 tax. For information on Part XII.2 tax, see Schedule 10 on page 40. \\ Column 3 - By preferred beneficiary election A trust and a preferred beneficiary can jointly elect to have the trust's accumulating income taxed in the hands of the preferred beneficiary. Use column 3 to allocate and designate the elected accumulating income. Complete a separate T3 slip for this income. You can designate the following types of income under a preferred beneficiary election: - taxable capital gains (line 921); - actual amount of dividends from taxable Canadian corporations (line 923); - foreign business income (line 924); and - foreign non-business income (line 925). You have to make the designations on the trust's return for the year in which you include the relevant amounts in the trust's income. If the income is allocated but no amounts are designated, enter the total amount on line 926. If you are designating the income, enter the amounts on the appropriate lines. In addition, use Part B for other amounts you are designating to the beneficiaries. \\ Part A - Total income allocations and designations to beneficiaries Lines 921 to 928 Answer all four questions, and attach any necessary statements. For information about income attributed to the transferor, see "Transfers and loans of property" on page 14. \\ Line 921 - Taxable capital gains You may allocate all or a portion of a Canadian resident trust's net taxable capital gains to a beneficiary. If you designate this amount, we consider it to be the beneficiary's taxable capital gain. A trust's net taxable capital gain is the amount by which the total of the trust's taxable capital gains for a taxation year is more than the total of: - the trust's allowable capital losses for the taxation year; and - net capital losses of other years deducted in calculating the trust's taxable income for the taxation year. When calculating the maximum net taxable capital gains available for designation in the current year, you have to reduce the net taxable capital gains (as calculated above) by: - any expenses the trust incurred to earn income included in line 01 of the return; and - amounts designated under subsection 104(13.2) to be taxed in the trust, other than amounts for which a deduction has been claimed on line 52. See " Income to be taxed in the trust" on page 35. PAGE 38 Note If the amount on line 01 includes any deemed taxable capital gains (including gifts of capital property), call us for more information. You have to include the following in the amounts you enter on line 921: - net taxable capital gains allocated to a non-resident beneficiary; and - net taxable capital gains allocated by a trust governed by an employee benefit plan. If you complete line 921 and you are allocating capital gains eligible for the capital gains deduction, you also have to complete line 930. The only taxable capital gains eligible for this deduction are from the disposition of qualified farm property and qualified small business corporation shares. Footnotes for line 921 The trust may have disposed of foreign property and is designating the capital gain to a beneficiary. Although the beneficiary reports this as a capital gain, the gain can be considered foreign non-business income when the beneficiary calculates a foreign tax credit. Enter on line 921-3, the taxable amount of capital gains included on line 921 from the disposition of foreign property. \\ Line 922 - Lump-sum pension income A testamentary trust can designate to a beneficiary, in a year throughout which it was a resident of Canada, certain pension income, superannuation benefits, and amounts received from a deferred profit sharing plan. Complete Schedule 7, Pension Income Allocations and Designations. Enter on line 922, those amounts from Schedule 7 that qualify for a transfer to a registered pension plan or a registered retirement savings plan. Line 925 - Foreign non-business income Enter all foreign non-business income designated to beneficiaries. This may include income from: - foreign employment; - foreign pension; and - interest from foreign sources. \\ Line 926 - Other income Enter all income allocated to beneficiaries that is not shown on lines 921 to 925. This includes business, farming, fishing, or rental income, interest or pension income (other than from foreign sources and lump-sum pension income included at line 922), death benefits, retiring allowances, and dividends under a dividend rental arrangement. Include any amount claimed on line 43 for the upkeep, maintenance, and taxes of a property used or occupied by a beneficiary, and the amount claimed on line 44 for the value of other benefits to a beneficiary. A testamentary trust may be able to designate, in a year throughout which it was a resident of Canada, a lump-sum payment out of a registered pension plan to a beneficiary to acquire an annuity. Include these amounts from Schedule 7, Pension Income Allocations and Designations, on line 926, and show the amount that qualifies for a transfer on line 936-1. Footnotes for line 926 Enter on line 926-1, the amount of business income included on line 926 from the disposition of eligible capital property that is qualified farm property eligible for the capital gains deduction. A communal organization has to show on line 926-3, the total amount of business income (farming, fishing, and other business) allocated to its members. Business income that a member received from the communal organization is considered self-employment earnings for determining Canada Pension Plan contributions. For more information, see Information Circular 78-5, Communal Organizations. \\ Line 928 - Totals The total of lines 921 to 926 is the income allocated to the beneficiaries. The amount cannot be more than "Income before allocations" on line 46 of the return. \\ Part B - Summary of other amounts designated to beneficiaries Lines 930 to 945 Complete this area only when there are designations, such as dividends from taxable Canadian corporations, foreign taxes paid for credit purposes, and pension income or retiring allowances qualifying for a transfer. Line 930 - Taxable capital gains eligible for deduction A personal trust that makes a designation on line 921 and has eligible taxable capital gains, also has to designate a portion of the trust's eligible taxable capital gains to the beneficiary for the beneficiary's capital gains deduction. Calculate the trust's eligible taxable capital gains on Schedule 3. Enter on line 930, the lesser of the following amounts: - the amount on line 921; or - the amount on line 34 of Schedule 3 minus the amount on line 926-1. Footnotes for line 930 Enter on line 930-1, the eligible taxable capital gains from qualified farm property, which is the lesser of: - the taxable capital gains from dispositions of qualified farm property; or - the taxable capital gains eligible for the deduction. Enter on line 930-2, the eligible taxable capital gains from qualified small business corporation shares, which is the lesser of: - the taxable capital gains from dispositions of qualified small business corporation shares; or - the taxable capital gains eligible for the deduction minus the taxable capital gains from qualified farm property entered on line 930-1. PAGE 39 \\ Line 931 - Qualifying pension income Enter those amounts from Schedule 7, Pension Income Allocations and Designations, that qualify for the pension income amount. You can make this designation only if the beneficiary was the spouse or common-law partner of the deceased, and if the trust received the benefits of a life annuity from a superannuation or pension plan. \\ Line 932 - Taxable amount of dividends If you are designating dividends to a beneficiary who is either an individual or a trust (other than a registered charity), enter the amount from line 923, multiplied by 1.25. Line 934 - Foreign non-business income tax paid If you are designating a foreign tax credit to a beneficiary, you have to submit an official receipt or information slip from the foreign country. This is necessary to support the claim that the trust paid foreign non-business income tax, or that it was withheld from foreign non-business income the trust earned. The portion of foreign taxes you designate to a beneficiary has to be in proportion to the foreign income you designate to that beneficiary. You have to convert any foreign taxes paid in foreign currency to Canadian funds. For more information, see Interpretation Bulletins IT-270, Foreign Tax Credit, and IT-201, Foreign Tax Credit - Trusts and Beneficiaries, and see Line 31 on page 43. \\ Line 935 - Eligible death benefits A testamentary trust may receive a payment as a result of the employee's death to recognize the employee's service in an office or employment. Such a payment is usually from the deceased person's employer or from a trust fund the employer established. This payment may qualify as a death benefit, and the trust may be able to exclude up to $10,000 of the amount from income. If you allocate the total death benefit to a single beneficiary according to the provisions of the will, the beneficiary may be able to exclude up to $10,000 of the payment from income. Enter on line 935, the amount from line 926 eligible for this exclusion. If you allocate the total death benefit to more than one beneficiary, apportion the amount eligible for this exclusion among those beneficiaries. The total eligible amount apportioned cannot exceed $10,000. The beneficiaries can use this information to calculate the taxable portion that they have to report on their T1 returns. If you exclude the eligible death benefit from the trust's income, only the taxable portion flows out to the beneficiary. Make sure that you report only the taxable portion of the death benefit on line 19 of the return. For more information, see Line 19 on page 18. \\ Line 936 - Miscellaneous Enter those amounts from Column D of Schedule 7, Pension Income Allocations and Designations, that qualify for an eligible annuity for a minor on line 936-1. Enter any retiring allowance eligible for a transfer on line 936-2. Enter charitable donations designated to the beneficiaries of a communal organization on line 936-3. Line 937 - Insurance segregated fund capital losses Enter the designated portion of net capital losses from the disposition of property by an insurance segregated fund. Line 938 - Part XII.2 tax credit Calculate the amount for line 14 of Schedule 10, and enter it here. Generally, you can designate the Part XII.2 tax credit only to those resident beneficiaries to whom you allocated income in column 1 of line 928, Schedule 9. \\ Line 939 - Federal dividend tax credit Enter the amount from line 932 multiplied by 13.3333%. Lines 940 and 941 - Investment tax credit (ITC) Only testamentary trusts and communal organizations that are deemed to be inter vivos trusts can designate an ITC to their beneficiaries. Complete Section 1 of Form T2038(IND), Investment Tax Credit (Individuals), to calculate the amount of the investment cost or expenditure and the ITC available. You will need the eligible amounts the trust invested to acquire property and the eligible expenditures for this part of the form. You have to reduce the trust's ITC by any amount allocated to beneficiaries. Enter the beneficiaries' share of the trust's investment cost or expenditures on line 940. You need this amount to determine the amount of the ITC you can designate to each beneficiary. Enter on line 941, the amount of the trust's ITC from Form T2038(IND) that you designated to a beneficiary and did not deduct on line 34 of the trust's Schedule 11. Line 945 - Other credits Newfoundland and Labrador research and development tax credit Enter the amount of this credit that you designated to a beneficiary and did not deduct on page 4 of the return. For more information, see "Newfoundland and Labrador research and development tax credit" on page 22. Yukon research and development tax credit Enter the amount of this credit that you designated to a beneficiary and did not deduct on page 4 of the return. For more information, see "Yukon research and development tax credit" on page 23. PAGE 40 Schedule 10 - Part XII.2 Tax and Part XIII Non-Resident Withholding Tax Complete Schedule 10 if the trust is allocating income to non-resident or other designated beneficiaries (see the next section for details). The total of Part XII.2 and Part XIII tax is approximately equal to the Part I tax, plus provincial or territorial taxes, that would apply to the income if the beneficiaries were resident in Canada. Part A - Calculating Part XII.2 tax and the refundable Part XII.2 tax credit Lines 1 to 14 Pay any Part XII.2 tax no later than 90 days after the trust's taxation year- end. Part XII.2 tax applies when a trust: - has specified income as described below; - has a designated beneficiary as described below; and - allocates or designates any of its income. Part XII.2 tax does not apply to a trust that was one of the following throughout the year: - a testamentary trust; - a mutual fund trust; - trust types A to I, or L in "Exemption from the 21-year rule" on page 30; - a trust that was exempt from Part I tax under subsection 149(1); - a non-resident trust; or \\\ - for taxation years ending after 2002, a deemed resident trust. \\\ Specified income Specified income of a trust generally means its taxable capital gains or allowable capital losses from the disposition of taxable Canadian property, certain property transferred to a trust in contemplation of a person beneficially interested in the trust ceasing to reside in Canada and the total income (or loss) from the following sources: - businesses carried on in Canada; - real properties located in Canada, such as land or buildings; - timber resource properties; and - Canadian resource properties the trust acquired after 1971. Note Although designated income is used in Part XII.2 of the Act, we use specified income in this guide and on Schedule 10 to avoid confusion with the term "designated income" used in other parts of this guide. Designated beneficiary A designated beneficiary for the purpose of Part XII.2 tax includes a beneficiary who is: - non-resident person; - a non-resident owned investment corporation; \\\ - a trust whose beneficiaries include a person or partnership that is a designated beneficiary or a trust, other than: - a testamentary trust; - a mutual fund trust; - a trust exempt from Part I tax under subsection 149(1); or - a trust whose interest in the first trust was owned at all times by persons who were exempt from Part I tax under subsection 149(1) and has no designated beneficiary; - a partnership whose members include another partnership or a designated beneficiary, unless the interest in the trust was owned at all times by the partnership or persons who were exempt from Part I tax under subsection 149(1) and there is no designated beneficiary; or \\\ - a person exempt from Part I tax under subsection 149(1), if that person acquired an interest in the trust, directly or indirectly, from a beneficiary of the trust after October 1, 1987. Note A person exempt from Part I tax is not a designated beneficiary if: - after either October 1, 1987, or the date the interest was created, whichever is later, any person exempt from Part I tax continuously held the interest; or - the person exempt from tax is a trust governed by a registered retirement savings plan or registered retirement income fund, and the trust acquired its interest directly or indirectly from its beneficiary, the beneficiary's spouse or common-law partner, or former spouse or common-law partner. A designated beneficiary is usually not entitled to the refundable tax credit for Part XII.2 tax that the trust paid. This means that you will generally not complete box 38 on the T3 slip for a designated beneficiary who is a Canadian resident. Also, before you calculate Part XIII non-resident withholding tax, you have to reduce the income payable to a non-resident beneficiary by the non-resident's share of the Part XII.2 tax. For more information, see Line 13 on the next page. Eligible beneficiary This term is used for a beneficiary who is not a designated beneficiary as described above. An eligible beneficiary is generally a Canadian resident who is entitled to a refundable Part XII.2 tax credit in proportion to the share of allocated or designated trust income. You have to include an amount equal to the Part XII.2 tax credit in the income allocated to the beneficiary. In effect, this credit replaces the PAGE 41 income that the beneficiary would have received if the trust did not have to pay Part XII.2 tax. Line 6 - Total specified income This is the total of lines 1 to 5, which represents the specified income of the trust. Part XII.2 tax does not apply if the amount on line 6 is negative. Line 11 - Adjusted amount allocated and designated to beneficiaries Enter the amount from column 1 of line 928, Schedule 9, on line 7. Enter the amount from column 2 of line 928, Schedule 9, on line 8. Subtract the taxable benefits you reported on line 44 of the return on line 10. Line 11 represents the following amounts: - the deduction from trust income for the portion of the trust's income you allocated to resident and non-resident beneficiaries, to be included in their income; and - the deduction from trust income for the Part XII.2 tax the trust paid for the year. Withhold the Part XII.2 tax from income you distribute to the beneficiaries. Line 12 - Part XII.2 tax payable Multiply by 36%, the lesser of the amount on line 6 and the amount on line 11. Enter this amount on line 83 of the return. Line 13 (Adjustment for Part XIII tax purposes) On this line, calculate the amount of Part XII.2 tax that you attribute to designated beneficiaries. Transfer the amount from line 13 to line 21 to reduce the income subject to Part XIII tax. Line 14 - Part XII.2 refundable tax credit for eligible beneficiaries This is the amount of Part XII.2 tax attributable to eligible beneficiaries. It is also the amount eligible for the Part XII.2 refundable tax credit for these beneficiaries. If there is more than one eligible beneficiary, use the following formula to determine the amount of refundable tax credit to report in box 38 of the T3 slip for each eligible beneficiary: +++ A multiplied by B divided by C where: A = Part XII.2 tax paid by the trust (line 12) B = each eligible beneficiary's share of the amount from line 11 (the trust income you allocated to the eligible beneficiaries) C = adjusted allocations or designations for the year (line 11) +++ Part B - Calculating Part XIII non-resident withholding tax Lines 15 to 26 Complete this part if the trust allocated income to non-resident beneficiaries. Line 20 - Amounts not subject to Part XIII tax: Other One example of an amount to enter on this line is an amount you paid or credited to a beneficiary resident in the United States, when the amount is derived from income sources outside Canada and it is not subject to withholding tax under the Canada - U.S. Tax Convention. Line 21 (Part XII.2 tax amount) On this line, enter the amount from line 13, which is the amount of Part XII.2 tax you attribute to designated beneficiaries. Lines 24 to 26 - Non-resident tax payable Complete the rest of this schedule by referring to the NR4 return for the trust. Every non-resident person has to pay Canadian income tax of 25% under Part XIII of the Act, unless a tax treaty or convention provides a lower rate. Part XIII tax is paid on amounts that a Canadian trust paid or credited, or is considered to have paid or credited, to non-residents. You have to withhold and remit tax on these amounts. This tax has to be received by the Canada Customs and Revenue Agency or a Canadian financial institution on or before the fifteenth day of the month after the month during which the tax was withheld. Calculate the amount of non-resident tax payable and any balance due by following the steps in Part B of Schedule 10. Send any balance due to us, with Form NR76, Non-Resident Tax - Statement of Account, which is a combined remittance statement and receipt. If you are remitting Part XIII tax for the first time, send us a statement with the trust's name and address, the type of payment (Part XIII tax), and the month during which you withheld the tax. When we receive the payment, we will issue a Form NR76 receipt. You can use the bottom portion for remitting future payments. You also have to complete an NR4 Summary, Return of Amounts Paid or Credited to Non-Residents of Canada, and an NR4 slip, Statement of Amounts Paid or Credited to Non-Residents of Canada. For more information on non-resident income tax, see: - Information Circular 76-12, Applicable Rate of Part XIII Tax on Amounts Paid or Credited to Persons in Countries With Which Canada Has a Tax Convention; - Information Circular 77-16, Non-Resident Income Tax; and - Interpretation Bulletin IT-465, Non-Resident Beneficiaries of Trusts. PAGE 42 Example An inter vivos trust resident in Canada has two beneficiaries: Adam, a resident of Canada who is an eligible beneficiary, and Meg, a non-resident who is a designated beneficiary. Each beneficiary is entitled to receive an equal share of the trust income that is distributed annually. The trust has $1,400 net income for the year, which includes net business income (from a business carried on in Canada) of $1,000, and net interest income of $400. On Schedule 10, the trustee would: - enter $1,000 on lines 1 and 6, since there are no other sources of specified income (the $400 interest is not specified income); - enter $1,400 on line 11, since this is the total amount from columns 1 and 2 of line 928 of Schedule 9; - enter the lesser of lines 6 ($1,000) and 11 ($1,400) in the calculation area for line 12; - multiply $1,000 by 36%, and enter the result ($360) on line 12; - calculate the amount that is not subject to Part XIII non-resident tax by completing the calculation area for line 13 (divide $700 by $1,400 and multiply by $360). Enter the result ($180) on line 13 and on line 21; and - calculate the amount of refundable Part XII.2 tax credit on line 14 by subtracting line 13 ($180) from line 12 ($360). Enter the result ($180) in box 38 on the T3 slip. Adam received $520, but he will include $700 ($520 + $180) in his income for the year. This amount, which is entered in box 26 on the T3 slip, is the 50% portion of the trust income distributed to him under the terms of the trust agreement. On his T1 return for 2003, he will claim a refundable Part XII.2 tax credit of $180. Meg received $520. This amount, which is entered on the NR4 slip, is the 50% of the trust income distributed to her under the terms of the trust agreement. On Schedule 10, the trustee reduces the total income paid or payable to non- resident beneficiaries (line 15) by the Part XII.2 tax (line 21). Line 23 ($700 minus $180 = $520) is the amount subject to non-resident tax. Completing the NR4 return The Non-Resident Withholding Tax Guide explains how to report amounts the trust paid or credited to non-residents of Canada and how to complete and distribute the NR4 return. Report the total trust income you allocated to a non-resident beneficiary as estate and trust income on the NR4 return. Types of income, except for taxable capital gains from a mutual fund trust, lose their identity when allocated to a non-resident beneficiary. Therefore, you have to total and report them as "Gross income" in box 16 of the NR4 slip. In box 14, enter an income code of "11" for estate or trust income. File this return no later than 90 days after the end of the trust's taxation year. Schedule 11 - Federal Income Tax Use Schedule 11 to determine the federal income tax payable by the trust. Note The trust may be subject to minimum tax. For more information, see Schedule 12 on page 45. Lines 8 and 9 - Federal tax on taxable income \\ Testamentary and grandfathered inter vivos trusts Federal tax rates for individuals apply to all testamentary trusts and to grandfathered inter vivos trusts. For more information on grandfathered inter vivos trusts, see page 7. Inter vivos trusts An inter vivos trust, other than a grandfathered inter vivos trust, is taxed at 29% of its taxable income. For more information, see Interpretation Bulletin IT-406, Tax Payable by an Inter Vivos Trust. \\ Line 22 - Tax adjustments - Lump-sum payments under ITAR 40 Use this line to add items such as the reduced tax that applies to lump-sum payments under section 40 of the Income Tax Application Rules (ITAR). For more information, see Line 02 on page 17. \\ Line 24 - Federal dividend tax credit Enter the amount of the federal dividend tax credit on dividends the trust received from taxable Canadian corporations in the taxation year. The dividend tax credit is two-thirds of the gross-up amount you calculated on line 21 of Schedule 8. Note Foreign dividends do not qualify for this credit. \\ Line 25 - Donations and gifts tax credit Attach to the return official receipts for all claims. There are four types of donations or gifts: - Donations to qualified donees - See the Gifts and Income Tax pamphlet for types of organizations that qualify; - Gifts to Canada, a province, or a territory; - Gifts of cultural property - Attach both the official receipt from the institution and Form T871, Cultural Property Income Tax Certificate, issued by the Canadian Cultural Property Export Review Board; and - Gifts of ecological property - Attach the official receipt and the Certificate for Donation of Ecologically Sensitive Land issued by the Minister of the Environment. \\\ Note After December 20, 2002, if the trust receives any form of compensation or advantage in exchange for the gift, only the eligible amount of the gift is included in determining the donations and gifts tax credit. For more information, see the Gifts and Income Tax pamphlet. \\\ PAGE 43 Testamentary trust If the donation is a one-time payment provided for in the deceased person's will, do not claim it on the T3 return. Instead, claim the donation on the deceased person's T1 return, either in the year of death or in the year before the year of death, or claim part of the donation on each return. If the donation is not a one-time payment (for example, a donation that will continue to be made according to the terms of the will), treat the recipient as an income beneficiary and deduct the donation as an allocation of trust income on line 47 of the return. You also have to include the donation on the appropriate line of Schedule 9. If the will provides that a donation can be made at the discretion of the trustee, you can: - choose to treat the recipient as an income beneficiary and deduct the amount on line 47 of the return; or - claim a non-refundable tax credit on line 25 of Schedule 11. When you are claiming a donation on the return, either as an income allocation or for a non-refundable tax credit, you should indicate on the return whether the donation is a one-time or periodic payment as provided in the will, or if it was made at your discretion. Inter vivos trust If the recipient is an income beneficiary according to the terms of the trust agreement, deduct the donation on line 47 of the return, and include it on the appropriate line of Schedule 9. In all other cases, calculate a non-refundable tax credit for the donation on line 25 of Schedule 11. Maximum claim and carryover The maximum claim for donations and gifts in the year is the sum of: - 25% of the taxable capital gains from the donation of capital property, less any capital gains deduction claimed against that property; - 25% of the recapture of capital cost allowance reported as a result of making the gift; and - 75% of the trust's net income (line 50 of the return). Note The limit of 75% of net income does not apply to gifts to Canada, a province, or a territory, which were made or agreed to before February 19, 1997, or to gifts of cultural or ecological property. For more information on calculating the maximum claim, see the Gifts and Income Tax pamphlet. Claim any portion of the trust's total donations, up to the maximum limit. Any unused portion can be carried forward for five years. If the trust donates an obligation of the trust or of a related person, a share issued by a corporation related to the trust, or any other security issued by a person related to the trust, contact us. A communal organization that made charitable donations can choose not to claim them and can elect to designate the donations to beneficiaries. For more information, see Information Circular 78-5, Communal Organizations. Line 26 - Minimum tax carryover from previous years If the trust paid minimum tax in the 1996 to 2002 taxation years, and does not have to pay minimum tax for the 2003 taxation year, you may be able to claim a credit against the trust's 2003 taxes payable. Use Part 7 of Schedule 12, Minimum Tax, to calculate the total minimum tax carryover. Note You can carry over minimum tax from the seven previous taxation years. Line 29 - Surtax on income not subject to provincial or territorial tax A resident trust that carries on business through a permanent establishment in a foreign country, has to pay a federal surtax of 48% of its basic federal tax attributable to the income earned in the foreign country. A non-resident trust, or a deemed resident trust, pays this tax instead of provincial or territorial tax. However, business income that the trust earned in a province or territory through a permanent establishment in that province or territory is subject to the provincial or territorial tax instead of this 48% surtax. For more information, see Form T2203, Provincial and Territorial Taxes for 2003 - Multiple Jurisdictions. Line 31 - Federal foreign tax credit This credit is available to a resident trust only for foreign income or profit taxes the trust paid on income it received from sources outside Canada. When you calculate the foreign tax credit, convert all amounts to Canadian currency. In general, the foreign tax credit you can claim for each foreign country is the lesser of: - the tax the trust paid to a foreign country; or - the tax payable to Canada on the portion of the income the trust earned in the foreign country. Use Form T2209, Federal Foreign Tax Credits, to calculate the trust's foreign tax credit. When you complete Form T2209, base the calculation of the credit on amounts the trust retains. Do not include any amounts relating to the designation of foreign income and foreign tax credits to the beneficiaries. Enter on line 31, the amount from line 10 of Form T2209. The trust's federal foreign tax credit may be less than the tax paid to a foreign country. The trust can carry unclaimed foreign tax paid on business income back three years and forward seven years. The trust cannot carry forward or carry back excess amounts of any foreign non-business income tax. You may be able to claim some or all of the excess as: - a provincial or territorial foreign tax credit on Form T2036, Provincial or Territorial Foreign Tax Credit (this does not apply to a trust that is a resident of Quebec); or PAGE 44 - a deduction on line 40 of the return (for information, see Interpretation Bulletin IT-506, Foreign Income Taxes as a Deduction from Income). Attach proof of the tax the trust paid to a foreign country. For more information, see Interpretation Bulletins IT-270, Foreign Tax Credit, and IT-201, Foreign Tax Credit - Trust and Beneficiaries. Line 33 - Allowable federal political contribution tax credit Claim this credit if the trust contributed to a registered federal political party or to a candidate for election to the House of Commons. Use the chart below to calculate the credit. \\\ For contributions made after December 20, 2002, you have to deduct any advantage the trust receives as a result of a contribution. This includes the total value at the time the contribution was made, of all property, services, compensation, or other benefits to which the trust, or a person not dealing at arm's length with the trust, is entitled as partial consideration for, or in gratitude for, the contribution. \\\ Enter the total allowable credit on line 33. If the trust's total eligible federal political contributions are $1,150 or more, enter $500 on line 33. Attach to the return, an official receipt as proof of the contribution. You do not have to attach a receipt for an amount shown in box 36 of a T5013 slip, or in a financial statement showing an amount a partnership allocated to the trust. For more information, see Information Circular 75-2, Contributions to a Registered Political Party or to a Candidate at a Federal Election. +++ Federal Political Contribution Tax Credit Total eligible federal political contributions ^ Allowable credit: Line a: 75% of first $200 of eligible federal political contributions ^ Line b: 50% of next $350 of eligible federal political contributions ^ Line c: thirty-three and one-third percent of eligible federal political contributions that are more than $550. ^ Line d: Total credit (add lines a, b, and c) = ^ Allowable credit - enter the lesser of line d or $500 on line 33 of Schedule 11. +++ Line 34 - Investment tax credit A trust can claim an investment tax credit (ITC) on eligible investments and qualified expenditures that are listed on Form T2038(IND), Investment Tax Credit (Individuals). For example, a trust can claim an ITC on certain buildings, machinery, or equipment to be used in certain areas of Canada in qualified activities such as farming, fishing, logging, or manufacturing. There is a time limit to complete and submit Form T2038(IND). To be able to claim an ITC, you have to send us the completed form no later than 12 months after the due date of the return for the year the expenditure occurred. Attach a completed copy of Form T2038(IND) to the return if the trust: - earned an ITC in the taxation year; - is carrying forward a credit; - is carrying back a credit; - had an ITC recapture; or - is claiming a refundable ITC in the taxation year (on line 88 of the return). Reduce the cost of eligible investments and qualified expenditures by the portion of the credit deducted or refunded. Reduce these costs in the year after the trust: - claims the credit; or - acquired the asset if it: - made the claim or refund in the year of acquisition; or - applied the claim to a previous year. For example, the capital cost of property is reduced in 2003 by any ITC which the trust earned in 2002, and which was claimed or refunded on the 2002 return or applied to a previous year. You will have to report an ITC recapture for the trust if the trust: - acquired the property in this or any of the previous 10 taxation years; - claimed the cost, or a portion of the cost, of the property as a qualified expenditure for Scientific Research and Experimental Development; - included the cost, or a portion of the cost, of the property in calculating the trust's ITC, or was the subject of an agreement to transfer qualified expenditures; and - disposed of the property or converted it to commercial use after February 23, 1998. \\\ Note An ITC recapture on a portion of the cost of property as described above applies only to dispositions that occur after December 20, 2002. \\\ Only a testamentary trust or a communal organization can designate an ITC to its beneficiaries. When you calculate the trust's ITC for the taxation year, do not include the part that is designated on line 941 of Schedule 9, according to the terms and conditions of the trust agreement, or by choice of the trustee. Reduce the cost of the qualified property acquisitions or expenditures by the amount of any ITC that you designated to the beneficiaries in the taxation year. For more information, see the instructions included with Form T2038(IND). PAGE 45 Line 35 - Other credits Credits you can claim at this line include: - a federal logging tax credit; and - a federal environmental trust tax credit. \\ Line 38 - Refundable Quebec abatement A trust is entitled to an abatement of 16.5% of its basic federal tax if it was resident in Quebec on the last day of its taxation year and it did not have income from a business with a permanent establishment outside Quebec. The abatement is provided instead of direct cost-sharing by the federal government under federal-provincial fiscal arrangements. Use Form T2203, Provincial and Territorial Taxes for 2003 - Multiple Jurisdictions, to calculate the refundable Quebec abatement if the trust: - was a resident in Quebec and had income from a business with a permanent establishment outside Quebec; or - resided outside Quebec and had income from a business with a permanent establishment in Quebec. Schedule 12 - Minimum Tax Read the following information to see if the trust is liable to minimum tax, and if you need to complete Schedule 12. The following trusts are not subject to minimum tax: - a mutual fund trust; - a related segregated fund trust; - a spousal or common-law partner trust, a joint spousal or common-law partner trust, or an alter ego trust, if they report in the year, their first deemed realization under the 21-year rule; and - a master trust. Minimum tax limits the tax advantage a trust can receive in a year from certain incentives. The most common situations that may make a trust liable to minimum tax are if it: - reports taxable dividends; - reports taxable capital gains; - makes an election on pension benefits under ITAR 40; - claims a loss resulting from, or is increased by, resource expenditures, or claims resource and depletion allowances on resource properties; or - claims a loss resulting from, or is increased by, capital cost allowance on rental or leasing property, or certified films or videotapes. The trust has to pay minimum tax if it is more than the federal tax calculated in the usual manner. \\ Provincial and territorial income tax Resident trusts A trust is liable for provincial or territorial tax at the rate that applies for the province or territory of residence if it: - was a resident of a province other than Quebec, or of a territory, on the last day of its taxation year; and - did not have income from a business with a permanent establishment outside the province or territory of residence. Use the applicable provincial or territorial tax form to calculate the provincial or territorial tax. If the trust was resident in the province of Quebec on the last day of its taxation year, see the note in the section called "Which tax package should you use?" on page 3. A resident trust may carry on a business with a permanent establishment: - in a province or territory other than the province or territory of residence; or - in a foreign country. In these cases, you have to calculate the trust's income from each source to determine the liability for: - provincial or territorial income tax; or - federal surtax for income not subject to provincial or territorial tax. Report income from a business for each province, territory, or foreign country in which the business had a permanent establishment during the taxation year. Attach a copy of this list to the return. In general, you should allocate all other income to the province or territory of residence. A trust resident in a province other than Quebec, or in a territory, on the last day of its taxation year may have a federal foreign tax credit that is less than the tax the trust paid to a foreign country. For more information, see Line 31 on page 43. You can apply this credit against provincial or territorial income tax. Non-resident trusts and deemed resident trusts A non-resident trust or a deemed resident trust that carries on a business through a permanent establishment in a province or territory is subject to provincial or territorial tax on the business income it earned in that province or territory. A non-resident trust or a deemed resident trust may carry on a business in Canada without a permanent establishment in Canada. In this case, it may be subject to the federal surtax. For more information, see Line 29 on page 43. PAGE 46 Chapter 4 - T3 slip and summary As trustee, you have to complete a T3 slip, Statement of Trust Income Allocations and Designations, for each resident beneficiary, including a preferred beneficiary, to whom the trust allocated income in the year. If you allocated income to a non-resident beneficiary, see "Column 2 - Non-resident," on page 37. This chapter provides information on how to complete the T3 slip. This slip is available in the following two formats: - single-copy for laser printers; and - three-copy carbon-loaded in continuous-feed. Notes The carbon-loaded version of the T3 slip is being eliminated and will no longer be available once stock has been depleted. The T3 slip shows only the high-use boxes (boxes 23, 32, 39, 21, 30, 26, 12, 16, and 18). There are also six generic boxes with blank codes for low-use amounts. If you need to use a generic box, enter the box number and the amount in the other information area. If you need more than six boxes for the same beneficiary, use an additional T3 slip. You can find a sample of the slip on page 50. You do not have to complete a T3 slip for a beneficiary if the only amount allocated in the year to that beneficiary is income less than $100. However, you have to notify the beneficiary of the allocated amount since it still has to be reported on the beneficiary's return. If you send us more than 500 slips, you have to file T3 slips on magnetic media. For more information, see "Filing on magnetic media" on page 12. You have to complete a T3 Summary, Summary of Trust Income Allocations and Designations, even if you prepare only one T3 slip. This is the form you use to record the total of the amounts you reported on all related slips. File only one summary for the trust, unless it is a mutual fund trust. See the back of the summary for information on how to complete it. You can find a sample of the form on page 51. \\ Recipient identification number The recipient identification number is one of the following: - the social insurance number (SIN), if the beneficiary is an individual (other than a trust); - the business number (BN), if the beneficiary is a corporation or partnership; or - the trust account number, if the beneficiary is a trust. This section explains the special rules and penalties that apply to the use of the SIN and the BN. Trustee - Anyone who prepares an information slip has to make a reasonable effort to get the SIN or BN from the person or partnership who will receive the slip. Unless you make a reasonable effort to get this information, you will be liable to a $100 penalty each time you do not provide the SIN or BN on the information slip. This penalty does not apply if the person or partnership has applied for, but not yet received, a SIN or BN when the return was filed. Beneficiary - Persons or partnerships (other than trusts) have to give their SIN or BN on request to anyone who has to prepare an information slip for them. If the person or partnership does not have a SIN or BN, the following rules apply: - the person or partnership must apply for the number within 15 days of your request (the SIN from any Human Resources Development Canada office, the BN from us); and - once the person or partnership has received the number, they have 15 days to give it to you. Persons or partnerships who, for any reason, do not comply with these requirements are liable to a penalty of $100 for each failure to give their SIN or BN. A beneficiary may indicate that a SIN or BN has been applied for, but has not yet been received, or the beneficiary may refuse to give you the number. In these cases, do not delay completing the information slip beyond the filing deadline. If you have not received the SIN or BN by the time you prepare the T3 slip, enter "nil" in box 12. If you have to prepare an information slip, you, your employees, officers, or agents cannot knowingly use, communicate, or allow a SIN or BN to be communicated, other than as required or authorized by law, without the written consent of the individual taxpayer or partnership. Any person who does so is guilty of an offence, and liable on summary conviction to a fine, imprisonment, or both. For more information, see Information Circular 82-2, Social Insurance Number Legislation That Relates to the Preparation of Information Slips. \\ How to complete the T3 slip Type or print the information on the slip. Report all amounts in Canadian dollars. If there is a preferred beneficiary election and other income is also allocated to the same beneficiary, complete one T3 slip for the elected income and a separate slip for all other allocated income. You can get the information needed to complete boxes 21 to 45 from Schedule 9, Income Allocations and Designations to Beneficiaries. Recipient's name and address - Enter the information in the white area provided. If the payment is to an individual, enter the beneficiary's name. If the payment is to a joint beneficiary, enter both names. If the payment is made to a trust, enter the name of the trust and not the names of the individual beneficiaries. If the payment is made to an association, organization or institution, enter that name. Following the beneficiary's name, enter the beneficiary's full address including city and province or territory. Also include the postal code. Year - Enter the applicable taxation year at the top of the slip. PAGE 47 Trust year ending - Use a four-digit number to indicate the year, and a two- digit number to indicate the month of the trust's taxation year-end. Note For your convenience, we have put the instructions for the following boxes in numeric order, even though the order on the slip may be different. \\ Box 12 - Recipient identification number You have to enter the beneficiary's social insurance number, business number, or trust account number. If you do not have the number, see "Recipient identification number" on the previous page. Do not leave this box blank. Box 14 - Account number You have to enter the trust's account number, if we have assigned one. Otherwise, enter "nil." Do not leave this box blank. \\ Box 16 - Report code Enter one of the following codes: Code 0 Type of slip: original Code 1 Type of slip: amended or cancelled If you use code 1, see "How to amend, cancel, or issue a duplicate T3 slip" on page 49. \\ Box 18 - Beneficiary code You have to enter one of the following codes to identify the type of beneficiary (do not leave this box blank): Code 1 Type of beneficiary: an individual Code 2 Type of beneficiary: a joint beneficiary Code 3 Type of beneficiary: a corporation Code 4 Type of beneficiary: an association, a trust (fiduciary, trustee, nominee, or estate), a club, or a partnership Code 5 Type of beneficiary: a government, a government enterprise, an international organization, a charity, a non-profit organization or other tax- exempt entity, or a deferred income plan that is exempt from tax Footnotes In some cases, you may have to enter information in the footnote area below boxes 14, 16, and 18 on the T3 slip. If you need more room to include an explanation in this area, prepare a separate statement and attach a copy to each copy of the slip. Box 21 - Capital gains Enter the beneficiary's share of the amount on line 921 of Schedule 9, multiplied by 2. Note If box 21 includes capital gains from foreign property, enter an asterisk (*) beside the amount in box 21. In the footnote area, for each country, enter "non-business income for foreign tax credit" and the taxable portion of the amount included in box 21 that relates to the disposition of foreign property. For more information, see Line 921 on page 37. \\ Box 22 - Lump-sum pension benefits Enter the beneficiary spouse's or common-law partner's share of the amount on line 922 of Schedule 9. \\ Box 23 - Actual amount of dividends Enter the beneficiary's share of the amount on line 923 of Schedule 9. If the beneficiary is an individual or a trust (other than a registered charity), see Box 32 and Box 39 for more instructions. Box 24 - Foreign business income Enter the beneficiary's share of the amount on line 924 of Schedule 9 (before withholding taxes). Notes Enter an asterisk (*) beside the amount in box 24. In the footnote area, identify each foreign country and the amount of business income from each country. Report all amounts in boxes 24, 25, 33 and 34 in Canadian dollars. Box 25 - Foreign non-business income Enter the beneficiary's share of the amount on line 925 of Schedule 9 (before withholding taxes). Note Enter an asterisk (*) beside the amount in box 25. In the footnote area, identify each foreign country and the amount of non-business income from each country. \\ Box 26 - Other income Enter the beneficiary's share of the amount on line 926 of Schedule 9. Include amounts such as the following in this box: - death benefits; - retiring allowances; - pension income other than lump-sum pension benefits already included in box 22; - net rental income; - net business, farming, and fishing income; and - interest income. Notes Enter an asterisk (*) beside the amount in box 26 if it includes any farming income from the disposition of eligible capital property which is qualified farm property. In the footnote area, enter "eligible capital property - qualified farm property," and the amount of the beneficiary's share from line 926-1 of Schedule 9. Enter an asterisk (*) beside the amount in box 26 if it includes business, farming, or fishing income from a communal organization. In the footnote area, enter "self-employment earnings for CPP purposes," and indicate the type of income - business, farming, or PAGE 48 fishing-and the amount of the beneficiary's share from line 926-3 of Schedule 9. No other footnotes are required for box 26. Box 30 - Capital gains eligible for deduction Only personal trusts complete box 30. Enter the beneficiary's share of the amount on line 930 of Schedule 9, multiplied by 2. Do not include farming income from the disposition of eligible capital property identified in the footnote to box 26. Note Enter an asterisk (*) beside the amount in box 30, and in the footnote area, enter either "qualified farm property" or "qualified small business corporation shares," whichever applies, and the amount eligible for the capital gains deduction. For more information, see Line 930 on page 38. \\ Box 31 - Qualifying pension income Enter the beneficiary spouse or common-law partner's share of the amount on line 931 of Schedule 9. This amount is included in box 26. \\ Box 32 - Taxable amount of dividends If the beneficiary is an individual or a trust (other than a registered charity), enter the amount of dividends from taxable Canadian corporations reported in box 23, multiplied by 1.25. Note If the beneficiary is a resident of Newfoundland and Labrador, enter an asterisk (*) beside the amount in box 32. In the footnote area, enter "NLDIV pre-Mar. 22," and the taxable amount of dividends that were declared and paid before March 22, 2002. Box 33 - Foreign business income tax paid Enter the beneficiary's share of the amount on line 933 of Schedule 9. Note Enter an asterisk (*) beside the amount in box 33. In the footnote area, identify each foreign country and the amount of foreign tax paid on business income from each country. Box 34 - Foreign non-business income tax paid Enter the beneficiary's share of the amount on line 934 of Schedule 9. Note Enter an asterisk (*) beside the amount in box 34. In the footnote area, identify each foreign country and the amount of foreign tax paid on non- business income from each country. \\ Box 35 - Eligible death benefits Enter the beneficiary's share of the amount on line 935 of Schedule 9. This amount is included in box 26. For more information, see Line 935 on page 39. \\ Box 36 – Miscellaneous Enter the beneficiary's share of the following amounts: - pension income that is eligible for a transfer to an eligible annuity for certain minors, from line 936-1 of Schedule 9 (also included in box 26); - a retiring allowance, which qualifies for a transfer to a registered pension plan or registered retirement savings plan, from line 936-2 of Schedule 9 (also included in box 26); and - charitable donations or gifts of a communal organization, from line 936-3 of Schedule 9. For more information, see Information Circular 78-5, Communal Organizations. Note Enter an asterisk (*) beside the amount in box 36. In the footnote area, enter the details of this amount. If you are designating more than one type of these amounts to one beneficiary, prepare a separate T3 slip for each type. Box 37 - Insurance segregated fund capital losses Enter the beneficiary's share of the amount on line 937 of Schedule 9, multiplied by 2. Box 38 - Part XII.2 tax credit Enter the beneficiary's share of the amount on line 938 of Schedule 9. For more information, see Schedule 10 on page 40. \\ Box 39 - Federal dividend tax credit If the beneficiary is an individual or a trust (other than a registered charity), enter 13.3333% of the amount in box 32. Boxes 40 and 41 - Investment tax credit Only a testamentary trust or a communal organization can complete boxes 40 and 41. If the trust made eligible expenditures in different regions, and the investment tax credit rates differ, prepare a separate T3 slip for each designation to beneficiaries. Box 40 - Investment cost or expenditures Enter the beneficiary's share of the amount on line 940 of Schedule 9. Box 41 - Tax credit Enter the beneficiary's share of the amount on line 941 of Schedule 9. Note Enter an asterisk (*) beside the amount in box 41. In the footnote area, enter the applicable investment code from Form T2038(IND), Investment Tax Credit (Individuals). For more information, see Lines 940 and 941 on page 39. Box 45 - Other credits Newfoundland and Labrador research and development tax credit Enter the beneficiary's share of the amount on line 945 of Schedule 9. PAGE 49 Yukon research and development tax credit Enter the beneficiary's share of the amount on line 945 of Schedule 9. Note Enter an asterisk (*) beside the amount in box 45. In the footnote area, enter "Newfoundland and Labrador R&D" or "Yukon R&D," whichever applies, and the amount of this credit from box 45. \\ Distributing the T3 slip Copy 1: Send us this copy, with the summary and return, no later than 90 days after the end of the trust's taxation year. Do not attach the summary and slips to the T3 return. For addresses and more information on filing requirements, see "Chapter 1 - General information" on page 7. Copies 2 and 3: Send these copies to the beneficiary's last known address no later than 90 days after the end of the trust's taxation year. If you have the information you need to complete the slips before that deadline, we encourage you to send them to the beneficiaries as early as possible. Copy 4: Keep this copy with the trust records. If you use the T3 slip for laser printers, see the instructions on the back of the laser form. \\\ You can now provide recipients with an electronic copy of their T3 slips. The recipient must consent in writing or by email that they wish to receive the slips in this format. \\\ How to amend, cancel, or issue a duplicate T3 slip If you find that a T3 slip includes an error before you file it, prepare a new slip and destroy any incorrect copies, or correct the slip and initial your changes. In either case, enter "0" in box 16. If you find that a T3 slip includes an error after you file it, send us a letter explaining the error along with the necessary slips, as explained below. Amended slips - If you have to change some of the data on a slip, change only the required entries and leave the original amounts in the other boxes. Print the word "AMENDED" at the top of the revised slip, and enter "1" in box 16. Send two copies to the beneficiary. If you have filed the original slip with us electronically, you can send us amendments and cancellations electronically. Send these changes in electronic format using hard medium (diskette or CD-ROM). For more information, visit our Web site at www.ccra.gc.ca/magmedia. Amendments submitted in electronic format should be sent to: Magnetic Media Processing Unit Ottawa Technology Centre Canada Customs and Revenue Agency Ottawa ON K1A 1A2 Cancelled slips - If you issued a slip by mistake and you want to cancel it, send us another slip with the same data as on the original. Print the word "CANCELLED" at the top of the slip, and enter "1" in box 16. Send two copies of the slip to the beneficiary. Duplicate slips - If you issue a slip to replace one that a client lost or destroyed, print the word "DUPLICATE" at the top of the slip. Send two copies to the beneficiary. Do not send us a copy of the duplicate slip. Note If the amended or cancelled T3 slip results in a change to the total dollar amounts for boxes 21 to 41, you also have to send us an amended summary. For more information, see the instructions on the back of the T3 Summary. PAGE 50 \\ Appendix A - T3 slip and summary T3 E (03) (Front) Canada Customs and Revenue Agency STATEMENT OF TRUST INCOME ALLOCATIONS AND DESIGNATIONS Year ^ Box 23: Actual amount of dividends ^ Box 32: Taxable amount of dividends ^ Box 39: Federal dividend tax credit ^ Box 21: Capital Gains ^ Box 30: Capital gains eligible for deduction ^ Box 26: Other income ^ Trust year ending Year/Month ^ Box 12: Recipient identification number ^ Box 14: Account number ^ Box 16: Report code ^ Box 18: Beneficiary code ^ Other information (see the back) Box ^ Amount ^ Box ^ Amount ^ Footnotes ^ Trust's name and address ^ Recipient's name (last name first) and address ^ PAGE 51 T3 Summary E (03) (Front) Canada Customs and Revenue Agency SUMMARY OF TRUST INCOME ALLOCATIONS AND DESIGNATIONS - Complete this summary if the trust allocated income to a resident beneficiary, including a preferred beneficiary, in the year. - If you are filing your T3 slips on magnetic media (tape, CD-ROM, or diskette), see "Filing on magnetic media," in Chapter 1 of the T3 Trust Guide. - File this summary with copy 1 of the related T3 slips, and the T3 Trust Income Tax and Information Return, no later than 90 days after the end of the trust's taxation year. Do not attach the summary and slips to the return. - See the back of this summary for instructions. Identification Name of trust ^ Name of trustee, executor, liquidator, or administrator ^ Mailing address of trustee, executor, liquidator, or administrator (or name and mailing address of the person to contact, if different) ^ Postal code (enter 6 digits) ^ Telephone number (including area code) ^ Summary for taxation year From: (Year/Month/Day) ^ To: (Year/Month/Day) ^ Box 10 Total number of T3 slips filed ^ Account number T (enter 8 digits) ^ Complete this area if you do not have an account number and you are submitting a paper return. If this is a testamentary trust, enter the social insurance number of the deceased (enter 9 digits) ^ Is this the first return for the trust? Yes or No ^ T3 slip totals Summary of income allocated and designated to resident beneficiaries (including preferred beneficiaries) Box 21: Capital gains ^ Box 22: Lump-sum pension benefits ^ Box 23: Actual amount of dividends ^ Box 24: Foreign business income ^ Box 25: Foreign non-business income ^ Box 26: Other income ^ Summary of amounts designated to resident beneficiaries (including preferred beneficiaries) Box 30: Capital gains eligible for deduction ^ Box 31: Qualifying pension income ^ Box 32: Taxable amount of dividends ^ Box 33: Foreign business income tax paid ^ Box 34: Foreign non-business income tax paid ^ Box 35: Eligible death benefits ^ Miscellaneous - footnotes to box 36 Box 36-1: Pension income eligible for transfer ^ Box 36-2: Retiring allowance eligible for transfer ^ Box 36-3: Eligible charitable donations ^ Box 37: Insurance segregated fund capital losses ^ Box 38: Part XII.2 tax credit ^ Box 39: Federal dividend tax credit ^ Investment tax credit Box 40: Investment cost or expenditures ^ Box 41: Tax credit ^ Box 45: Other credits ^ Do not use this area Summary of footnote amounts Box 21 - Non-business income for foreign tax credit ^ Box 26 - Eligible capital property - qualified farm property ^ Box 26 - Self-employment earnings ^ Box 30 - Qualified farm property ^ Box 30 - Qualified small business corporation shares ^ Certification I, (Please print) ^ certify that the information given on the T3 Summary and the related T3 slips, is, to the best of my knowledge, correct and complete. Date (Year/Month/Day) ^ Authorized person's signature ^ Position or title ^ PAGE 52 T3 Summary E (03) (Back) Completing your T3 Summary Identification Complete this area using the same information that you entered in the identification area on the T3 Trust Income Tax and Information Return. Total number of T3 slips filed Enter the total number of T3 slips that you have included with this summary. T3 slip totals The line numbers in this area are the same as the box numbers shown on a T3 slip. For each box number, add the amounts from all of the T3 slips filed with this summary, and enter the total on the corresponding line of this summary. Summary of footnote amounts Boxes 21, 26, or 30 on a T3 slip may contain amounts that you identified with an asterisk (*). You should explain these amounts in the footnote area of the slip. For each footnote type, add the amounts from all of the T3 slips filed with this summary, and enter the total on the corresponding line of this summary. For more information on the footnotes, refer to the text for the applicable box number in the T3 Trust Guide. Certification Ensure that you date and sign this area before sending us the summary. Keep a copy of the T3 Summary with the trust records. Where to file? Trusts resident in Canada Ottawa Technology Centre Canada Customs and Revenue Agency Ottawa ON K1A 1A2 Non-resident trusts and deemed resident trusts International Tax Services Office Canada Customs and Revenue Agency Ottawa ON K1A 1A8 Magnetic media filers Send us your tape, CD-ROM, or diskette. Do not send us a paper copy of this form or T3 slips. Magnetic Media Processing Team Ottawa Technology Centre Canada Customs and Revenue Agency Ottawa ON K1A 1A2 Amending your T3 Summary If you prepare an amended T3 slip after you have filed the original with us, you have to file an amended T3 Summary showing the revised totals. If the amended T3 slip affects the amounts shown on the T3 Trust Income Tax and Information Return, or on Schedule 9, Income Allocations and Designations to Beneficiaries, do not file another T3 return. Send us a letter providing the details of the change. Indicate the taxation year you want us to change and attach any supporting documents. Include the trust's account number on the letter. PAGE 53 Index Topic/Income Tax Act reference/Page Actual amount of dividends from taxable Canadian corporations, references 82(1), 260(5), pages 17, 31 Adjusted cost base, references 53, 54, page 26 Allocations and designations, references 104(6), (13), (19), (20), (21), (22), (22.1), (27), (27.1), (29), page 33 Allowable business investment losses (ABIL), references 38(c), 39(1)(c), 39(10), 50(1), page 19 Allowable federal political contribution tax credit, reference 127(3), page 44 Alter ego trust, references 248(1), 104(4)(a), page 7 Bonds, page 27 British Columbia mining exploration tax credit, page 23 Canadian cultural property, references 39(1)(a)(i.1), 118.1(10), page 25 Capital dispositions, page 25 Capital gains, references 3, 38, 38.1, 39, 40, 138.1(3), pages 16, 25, 37, 47 Capital gains deduction, reference 110.6(12), pages 22, 29, 38, 48 Capital gains reduction on flow-through entities, references 39.1(1), (2), (3), page 28 Capital gains refund, reference 132, page 22 Carrying charges and interest expenses, references 20(1)(c), (bb), 20(2.1), pages 19, 32 Clearance certificate, reference 159(2), (3), page 14 Communal organization, reference 143, page 8 Completing the NR4 return, page 42 Death benefits, references 104(28), 248(1), pages 18, 39, 48 Deemed realization (disposition), references 104(4), (5), (5.1), (5.2), pages 18, 29 Deemed resident trust, reference 94(3), page 8 Definitions - Administrator, page 5 - Allocate, allocation, page 5 - Arm's length transaction, page 5 - Beneficiary, page 5 - Common-law partner, page 5 - Contribution, page 5 - Deemed disposition, page 5 - Designate, designation, page 5 - Distribute, distribution, page 5 - Elect, election, page 5 - Excluded property, page 5 - Executor, page 5 - Exempt property, page 5 - Flow-through entity, page 5 - Gift, page 6 - Inter vivos, page 6 - Inter vivos gift, page 6 - Liquidator, page 6 - Preferred beneficiary, page 6 - Principal residence, page 6 - Settlor, page 6 - Spouse, page 6 - Testator, page 6 - Trust, page 6 - Trustee, page 6 - Vested interest, page 6 - Will, page 6 Designated beneficiary, reference 210, page 40 Distributing the T3 slip, page 49 Distribution of property to beneficiaries, references 104(5.3), 107(2), (2.1), (2.2), (4), page 24 Dividend income, references 82(1), 104(19), pages 17, 31, 33 Dividends, gross-up, reference 82(1)(b), page 32 Dividends, non-taxable received by a trust, references 53(2), 83(1), (2), 104(20), page 32 Donations and gifts, references 104(6), 118.1, 143(3.1), pages 29, 42 PAGE 54 Topic/Income Tax Act reference/Page Election - 164(6), page 24 Election - 164(6.1), page 25 Election to defer payment of tax (Form T2223), reference 159(6.1), (7), page 31 Elections (late or amended), references 220(3.2), Reg. 600, page 14 Eligible beneficiary, page 40 Employee benefit plan, references 6(1)(g), 6(10), 12(1)(n.1), 18(1)(o), 32.1, 104(6), 248(1), page 9 Employee trust, references 6(1)(h), 104(6), 248(1), page 10 Exemption from the 21-year rule, reference 108(1), page 30 Fairness and client rights, page 3 Farming and fishing losses, references 31, 111(1)(c), (d), 111(8), page 21 Farming income, page 17 Federal dividend tax credit, reference 121, page 42 Federal foreign tax credit, references 20(11), (12), 126, page 43 Federal income tax, page 42 Federal political contribution tax credit, reference 127(3), page 44 Final return, page 12 Fishing income, page 17 Foreign investment income, pages 17, 32 Foreign non-business income tax paid, references 104(22.1), 126(1)(a), pages 39, 48 Foreign property - Reporting requirements, page 16 General information, page 7 Grandfathered inter vivos trust, reference 122(2), pages 7, 42 Gross-up amount of dividends, reference 82(1)(b), page 32 How to file, page 12 Identification and other required information, page 15 Income paid or payable to non-resident beneficiaries, references 104(13), 212(1)(c), page 37 Income paid or payable to resident beneficiaries, page 37 Income to be taxed in the trust, page 35 Insurance segregated fund trust, reference 138.1, page 9 Inter vivos trust, references 108(1), 122, pages 7, 11, 42, 43 Interest, references 161, 164(3), 248(11), Reg. 4300, 4301, 4302, page 13 Investment income, pages 17, 31 Investment tax credit, references 13(7.1), 37(1), 127(5), (12.3), 180, pages 39, 44 Investment tax credit (ITC) designated, reference 127(7), pages 39, 48 Joint spousal or common-law partner trust, references 248(1), 104(4)(a), page 8 Listed personal property, references 41, 54, page 28 Loss carryback, request, page 21 Lump-sum payments, references ITAR 40(1), (5), (7), pages 17, 42 Lump-sum pension income, references 104(27), (27.1), 60(j), page 38 Magnetic media filing, page 12 Master trust, references 149(1)(o.4), Reg. 5001, page 10 Minimum tax, references 120.2, 127.5 to 127.55, pages 43, 45 Miscellaneous designated income, references 60(j.1), 60(l), 143(3.1), pages 39, 48 Mutual fund trust, references 132(6), (6.1), (7), Reg. 4801, 4803, page 8 Mutual fund units and other shares, reference 248(1), page 27 Net capital losses of other years, references 3, 38, 39, 104(21), 111(1)(b), 111(8), page 21 Newfoundland and Labrador Research and Development Tax Credit, pages 22, 39, 48 NISA Fund 2, references 12(10.2), 104(5.1), (6)(b), 104(14.1), 248(1), page 17 Non-capital losses of other years, references 111(1)(a), 111(8), page 21 Non-profit organization, references 149(1)(l), 149(5), (12), page 9 Non-resident beneficiaries, pages 37, 42 Non-resident tax payable, reference 212(1)(c), pages 40, 43 Non-resident trusts, pages 12, 43, 45 Non-resident withholding tax - Part XIII, reference 212, page 41 PAGE 55 Topic/Income Tax Act reference/Page Other credits, pages 22, 45 Other income, pages 18, 38, 47 Other investment income, pages 17, 32 Other required information, page 16 Outlays and expenses, reference 40(1), page 26 Part XII.2 tax, references 210 to 210.3, page 40 Part XII.2 tax credit, reference 120(2), pages 22, 39, 48 Part XIII tax, references 212 to 217, page 41 Penalties, references 162(1), (2), (7), 163(1), 238(1), Reg. 209, page 13 Pension income (benefits), references 56(1)(a)(i), 147(10), pages 17, 38, 48 Personal trust, reference 248(1), page 7 Personal-use property, references 40(2)(g)(iii), 46, 54, page 27 Political contribution tax credit (federal), reference 127(3), page 44 Preferred beneficiary election, references 104(12), (14), (14.01), (14.02), (15), 108(1), Reg. 2800, pages 36, 37 Principal residence, references 40(2)(c), (4), 54, 107(2.01), pages 6, 28 Problem Resolution Program, page 58 Proceeds of disposition, references 54, 107(2), (4), page 25 Property acquired before 1972, references 40(1), ITAR 24, 26(3), and 26(7), page 26 Qualified farm property, references 110.6(1), (14), 248(1), page 26 Qualified small business corporation shares, references 110.6(1), (14), 248(1), page 26 Qualifying pension income, references 104(27), 118(7), pages 39, 48 Real estate and depreciable property, references 13(21), ITAR 20(1), page 27 Reassessments, references 152(3.1), (4), (4.1), (4.2), 244(14), (15), page 13 Recipient identification number, references 162(5), (6), 237, 239(2.3), pages 46, 47 Refundable Part XII.2 tax credit, pages 22, 39, 48 Refundable Quebec abatement, reference 120(2), page 45 Registered retirement savings plans (RRSP), page 18 Rental income, page 17 Reserves on dispositions of capital property, reference 40(1)(a)(iii), page 28 Residence of trust, pages 12, 45 Resource allowance, references 20(1)(v.1), 20(15), Reg. 1206(1), 1210, page 20 Retirement compensation arrangement (RCA), reference 248(1), page 9 RRSP, RRIF, or RESP trusts, page 10 Salary deferral arrangement, references 6(1)(a) (i), 6(11), (12), 248(1), page 9 Schedule 1 - Dispositions of Capital Property, page 24 Schedule 8 - Investment Income, Carrying Charges, and Gross-up Amount of Dividends Retained by the Trust, page 31 Schedule 9 - Income Allocations and Designations to Beneficiarie, references 104(13), (14), 108(1), 212(1)(c), Reg. 2800, page 33 Schedule 10 - Part XII.2 Tax and Part XIII Non-Resident Withholding Tax, page 40 Schedule 11 - Federal Income Tax, page 42 Schedule 12 - Minimum Tax, page 45 Specified income, reference 210.2(2), page 40 Specified personal trust, reference 251(1), page 8 Split income, reference 120.4, page 15 Spousal or common-law partner trust, references 104(4)(a), 108(1), page 8 Summary of deemed realizations (Form T1055), references 104(4), (5), (5.1), (5.2), page 29 Surtax on income not subject to provincial or territorial tax, reference 120(1), page 43 T3 slip (completing and distributing), page 46 Tax adjustments - Lump sum payments, reference ITAR 40, page 42 Tax package, page 3 Tax paid by instalments, page 22 Taxable capital gains, references 3, 38, 39, 40(1), 104(21), (21.3), pages 16, 25 Taxable capital gains eligible for deduction, references 104(21), (21.1), (21.2), 110.6, pages 38, 48 Taxation year, references 104(23), 248, 249(1)(b), page 11 Testamentary trust, references 73, 108(1), 248(8), (9.1), pages 7, 11 PAGE 56 Topic/Income Tax Act reference/Page Total capital losses transferred under, reference 164(6), page 29 Total income allocation and designations to beneficiaries, page 37 Transfer and loans of property, references 56(4.1) to (4.3), 74.1(1), (2), 74.2, 74.3, 74.5, 14 248(25), 251, 252, page 14 Transfer of trust property to another trust, reference 104(5.8), page 31 Trustee fees, references 9(1), 20(1)(bb), page 19 Types of trusts, page 7 Unit trust, reference 108(2), page 8 Upkeep, maintenance, taxes – Beneficiary, reference 105(2), page 20 Value of other benefits to a beneficiary, reference 105(1), page 20 Yukon mineral exploration tax credit, page 23 Yukon research and development tax credit, pages 23, 39, 49 PAGE 57 References The following publications can be ordered by calling 1-800-959-2221. Most of our publications are available on our Web site at www.ccra.gc.ca. Forms T88 British Columbia Mining Exploration Tax Credit (Individuals) T184 2003 Capital Gains Refund for a Mutual Fund Trust T1055 Summary of Deemed Realizations T1079 Designation of a Property as a Principal Residence by a Personal Trust T1129 Newfoundland and Labrador Research and Development Tax Credit (Individuals) T1141 Information Return in Respect of Transfers or Loans to a Non-Resident Trust T1142 Information Return in Respect of Distributions From and Indebtedness to a Non-Resident Trust T1199 Yukon Mineral Exploration Tax Credit T1206 Tax on Split Income - 2003 T1232 Yukon Research and Development Tax Credit (Individuals) T2036 Provincial or Territorial Foreign Tax Credit T2038(IND) Investment Tax Credit (Individuals) T2203 Provincial and Territorial Taxes for 2003 - Multiple Jurisdictions T2209 Federal Foreign Tax Credits T3A Request for Loss Carryback by a Trust TX19 Asking for a Clearance Certificate Guides T4037 Capital Gains T4003 Farming Income RC4060 Farming Income and the CAIS Program RC4120 Filing the T4 Slip and Summary Form T4004 Fishing Income P113 Gifts and Income Tax T4061 Non-Resident Withholding Tax Guide T4011 Preparing Returns for Deceased Persons T4041 Retirement Compensation Arrangements Guide T4040 RRSPs and Other Registered Plans for Retirement Interpretation Bulletins IT-96 Options Granted by Corporations to Acquire Shares, Bonds, or Debentures and by Trusts to Acquire Trust Units IT-201 Foreign Tax Credit - Trusts and Beneficiaries IT-270 Foreign Tax Credit IT-286 Trusts - Amount Payable IT-337 Retiring Allowances IT-342 Trusts - Income Payable to Beneficiaries IT-369 Attribution of Trust Income to Settlor, and its Special Release IT-370 Trusts - Capital Property Owned on December 31, 1971 IT-374 Meaning of "Settlor" IT-381 Trusts - Capital Gains and Losses and the Flow-Through of Taxable Capital Gains to Beneficiaries IT-394 Preferred Beneficiary Election IT-406 Tax Payable by an Inter Vivos Trust IT-447 Residence of a Trust or Estate IT-465 Non-Resident Beneficiaries of Trusts IT-502 Employee Benefit Plans and Employee Trusts, and its Special Release IT-508 Death Benefits IT-510 Transfers and Loans of Property Made After May 22, 1985 to a Related Minor IT-524 Trusts - Flow-Through of Taxable Dividends to a Beneficiary - After 1987 Information Circulars 77-16 Non-Resident Income Tax 78-5 Communal Organizations 82-6 Clearance Certificate 92-1 Guidelines for Accepting Late, Amended or Revoked Elections PAGE 58 Contacting us Once a trust return is filed, the information on it becomes confidential. For this reason, we follow certain procedures before giving out information about the trust. Information can be given only to the trustee (or other legal representative who filed the return, such as an executor, administrator, assignee, receiver, or liquidator) or an authorized representative. The authorized representative could be an accountant, lawyer, or tax preparer acting for the trustee. Although beneficiaries are entitled to information related to their personal tax situation, they are not entitled to information from us about the tax affairs of the trust. Getting information in person If you visit us, we will ask for: - personal identification, which may be one piece of signed identification with your picture or two pieces of signed identification; - trust identification, which may be a copy of the will, trust agreement or letters of administration, or confirmation that a copy of one of these documents has been filed with us. We will also accept other identification, such as a copy of the Notice of Assessment or other information about the contents of the trust return; and - a business card or some other form of corporate identification, if you are an employee of a corporate trustee. If your representative visits us, we will ask for the same identification. We will also ask for evidence that you have authorized this person to represent you. Some of the trust's tax information is readily available and can be given to you as soon as we confirm that you are entitled to it. However, a pre-arranged appointment will ensure that the information you need will be available when you visit. Getting information by telephone If you call us, we will ask: - for your name and address, and the date you were appointed as trustee; - whether a copy of the will, trust agreement, or letters of administration has been filed with us. If not filed, we will ask for a copy or for some other form of proof that will allow us to give you the information you need. If you have questions about the assessment of the trust's return, we may also ask you for information about the return; and - for the date that your company was appointed as trustee, if you are an employee of a corporate trustee. If your representative calls us, we will ask for evidence that you have authorized this person to obtain information on your behalf, in addition to the trust-related identification. If you use a teletypewriter, you can call our bilingual enquiry service at 1- 800-665-0354 during regular hours of service. Giving or cancelling an authorization You can authorize a representative or cancel an authorization already given by writing to us, or by sending in a completed Form T1013, Authorizing or Cancelling a Representative. You can include this form with the trust's T3 return, but do not staple it to the return. The authorization, or cancellation of an authorization, should include: - the name, address, and account number of the trust; - your representative's name (only the business name of a firm or partnership need appear, unless authorization is to be restricted to a certain member) and telephone number; - the taxation year or years to which the authorization, or cancellation of the authorization, applies; and - your signature and title as the authorized signing person (trustee, executor, administrator, or liquidator), your telephone number, and the date. You have to complete a separate written authorization or consent form for each representative appointed or cancelled for a taxation year or years. Sending information by fax Please use the facsimile service for correspondence only. Because this service relies on the telephone network, we are not responsible for misdirected, incomplete, or unclear documents. Problem Resolution Program We are committed to providing you with service that is fair, accurate, timely, courteous, and confidential. The Enquiries staff of your tax services office will help you with any tax- related questions or problems you may have. If a problem is not resolved to your satisfaction, you can contact a Problem Resolution Program co-ordinator at your local tax services office. The co-ordinator will be in touch with you right away to let you know they are working on your concern. The address and numbers for this office are listed in the government section of your telephone book. Our goal under this program is to provide you with a solution within 15 working days. If we are unable to resolve your issue within that time (for example, if your case is complex), we will contact you to discuss your case and let you know when you can expect a reply. Back Cover Your opinion counts! We review our publications every year. If you have any comments or suggestions that would help us improve them, we would like to hear from you. Please send your comments to: Client Services Directorate Canada Customs and Revenue Agency Lancaster Road Ottawa ON K1A 0L5