Preparing and Filing Income Tax Forms for Clients

Your client’s income tax preparation may see you reporting various types of income, so you will need to familiarize yourself with specific tax return forms to account for each instance. As the client, or taxpayer, must pay the appropriate taxes on the different forms of income generation. Therefore, the focus of this article is on the tax forms that cover trust income and investment income, specifically the T3 form and T5 form.

Income Tax Return Preparation

To report your clients’ various types of income, you will need specific tax forms for each instance. For example, business income and employment income are handled differently. Reporting self-employed business and professional income requires the T2125 Statement of Business or Professional Activities. Employment income, on the other hand, is reported on the T4 Statement of Remuneration Paid.

Some of your clients might have trust income or investment income to report. In that case, you will need to use the T3 form to account for all trust income, and the T5 form to account for various types of investment income. Let’s explore these two forms further.

What is a T3?

The T3 Statement of Trust Income Allocations and Designations (slip) is the tax form that deals with income generated by trusts. Trusts are established as a form of legal protection for the creator- or truster- that preserves their assets while ensuring the distribution of assets according to the truster’s wishes. Some trusts can also reduce inheritance or estate taxes.

Trust Account Number

Before filing client T3 trust returns, you will need certain statements and information from them. This includes the trust account number necessary to file this kind of return. Has your client already applied for this account number and become the trustee, or will the client’s administrator, executor, liquidator, or yourself need to apply for this number on their behalf?

Should you need to apply for the trust account number on their behalf, you will need to complete the T3 Application for Trust Account Number document (T3APP) and have a signed copy of the trust document or relevant last will. Together, these documents can be submitted to the CRA.

Types of Trusts Found on the T3

There are two categories of trusts that the CRA recognizes on this T3 trust return:

  • Testamentary Trust: A trust created upon an individual’s death, established through their will or by court order in connection to the deceased individual’s estate under provincial law.
  • Inter Vivos Trust: Any trust that is NOT a testamentary trust.

To determine the residence of the trust for Canadian tax purposes, you will need to identify where the central running of the trust takes place. This location will be needed for the T3 return. Testamentary trusts and inter vivos trusts have different tax rules. Within inter vivos trusts fall various other types of trusts.

All types of trusts categorized as testamentary trusts or the various kinds of Inter vivo trusts that could show up on the T3 trust return are listed below, with their attached tax code as follows:

  • Testamentary trusts – Code 900
  • Inter vivos trusts:
  • Alter ego trust – Code 336
  • Blind / revocable trust – Code 333
  • Communal organization – Code 335
  • Employee benefit plan – Code 326
  • Employee life and health trust (ELHT) – Code 321
  • Employee trust – Code 332
  • Environment quality Act trust – Code 314
  • Graduated rate estate (GRE) – Code 903
  • Health and welfare trust (HWT) – Code 305
  • Hepatitis C trust and Indian residential school trust – Use code 316 for Hepatitis C trust and code 317 for Indian residential school trust.
  • Insurance segregated fund trust – Use code 327 for fully registered trust, Code 328 for a partially registered trust, and code 329 for a non-registered trust.
  • Joint spousal or common-law partner trust – Use code 335. However, if the trust is continued after the death of the last surviving beneficiary, use code 300.
  • Lifetime benefit trust – Use code 901, or code 903 for an estate designated as a graduated rate estate.
  • Master trust – Code 337
  • Mutual fund trust – Code 324
  • Non-profit organization – Use code 330 for a non-profit organization-subsection 149(5) trust or code 331 for a non-profit organization trust-subsection 149(1)(l)
  • Nuclear fuel waste Act trust – Code 315
  • Other trust – Code 300
  • Personal trust – Code 334
  • Pooled registered pension plans (PRPP) – Code 519
  • Qualified disability trust (QDT) – Code 904
  • Real estate investment trust (REIT) – Code 304
  • Registered disability savings plan (RDSP) trust – Code 303
  • Registered education savings plan (RESP) trusts – Code 319
  • Registered retirement income fund (RRIF) trust – Code 302
  • Registered retirement savings plan (RRSP) trust – Code 301
  • Salary deferral arrangement (SDA) – Code 306
  • Specified investment flow-through (SIFT) trust – Code 338
  • Spousal or common-law partner trust – Use code 905, or code 332 if one of the spouses or partners has died in the specified tax year.
  • Tax-free savings account (TFSA) trust – Code 318
  • Unit trust – Code 323

It's important to note that you may not need to file a T3 return for a deceased client, only if the estate is distributed immediately after their death, or if the estate didn't earn any income before the distribution. If this is the case, you will need to give each beneficiary of the estate a statement showing their share.

If the client’s trust holds or has held foreign property worth more than $100,000 CAD, you may need to attach form T1135 – Foreign Income Verification Statement to their income return. Furthermore, if the direct deposit information has changed between tax years, you will need to fill out form T3-DD – Direct Deposit Request for T3 to inform the CRA of this change.

What is a T5?

You will need to file the T5 – Statement of Investment Income return if your client has made particular payments to a resident of Canada or has received particular payments as a nominee or agent on behalf of another resident of Canada in the tax year. These particular payments include:

  • Eligible dividends and other dividends not categorized as eligible dividends
  • Interest received from any of the following: a fully registered bond or debenture, an account with an investment broker or dealer, money loaned to or on deposit with and property of any kind placed with a corporation, organization institution, partnership, or trust, an insurance policy or annuity contract, an amount owing as compensation for expropriated property
  • Specific amounts distributed from an eligible funeral arrangement
  • Amounts included in a policyholder’s income
  • Any royalties from the use of a work, invention, or right of production from natural resources
  • Payments of income and capital made by an association, organization, institution, corporation, partnership or trust
  • Interest deemed to accrue as dictated by the Income Tax Act, subsection 20(14.2)

The T5 slip is for all provinces and territories in Canada, including Quebec. However, in Quebec, there's an additional slip which is known as the RL-3 Invest Income Slip. The RL-3 must be filed by anyone living in Quebec who paid or credited an investment income of $50 or more to another during the tax year.

Completing the T5 Slip

The T5 slip informs the CRA of the various types of investment income of your client, that they must report on their income tax returns. One slip must be completed for each source of investment income, every T5 slip should include:

  • Recipient’s name and address: if there is more than one recipient of the investment income, you must report their name and address as well. If the recipient other than your client is a corporation, use the name of the corporation. If it is an association, organization, or institution, use that specific name. If this recipient is to the registered
  • Payer’s name and address
  • The year in which the recipient received the investment income
  • The boxes associated with the relevant dividends

It's important to note that you won't need to fill in a T5 slip for investment income to a recipient if the total amount reported is less than $50.

If you must use more than 50 slips for your client for a calendar year, you must file their T5 information returns over the internet. The CRA still suggests filing the return online for fewer than 50 T5 slips per calendar year, as it makes it easier and quicker to process taxes accurately.

T5 Summary

You will only need to complete and file a T5 Summary if you are filing your client’s T5 slips on paper. The Summary should only include amounts that are reported on the slips. If you submit client returns electronically, then you will NOT need this summary form.

T3 Tax Return Deadlines

The deadline for the T3 Statement of Trust Income Allocations and Designations returns depends on the trust’s tax year-end. The CRA dictates that in one calendar year, the T3 return and related summaries and forms must be submitted to the government no later than 90 days after the trust’s tax year-end. Any balance owing should also be paid off within this 90-day deadline. Slips to the beneficiaries of the trust must also be sent out no later than this 90-day period.

If your client possesses a testamentary trust that is a graduated rate estate, then you must file their T3 form and pay any balance owing before 90 days have passed from the trust’s discontinuation, or wind-up, date. When winding up a graduated rate estate, the tax year ends on the date of the final distribution of assets.

T5 Tax Return Deadlines

The T5 form, Statement of Investment Income returns, is due by the last day of February in the following calendar year to which the return applies. The CRA stipulates that if the deadline falls on a Saturday, Sunday, or recognized statutory holiday, the return is deemed on time if the government has received it, or it's postmarked before the next day. Therefore, it's important to note which province or territory your client resides in to determine their unique holidays that could affect the due date.

Recipients of investment income can be sent electronic copies of their corresponding T5 slips. However, recipients receiving copies electronically must first consent in writing or email. They must receive the slips by the same deadline as the T5 information returns. As a tax preparer, this task may fall to you, so it’s important to keep tabs on client slips such as these.

How to File Client Income Tax Forms

Once all client T3 and T5 CRA tax forms are completed, you can file online and electronically using ProFile Professional Tax prep and Efile software. ProFile is Intuit’s desktop tax prep software for professionals. It offers users specialized T3 modules and T4/T5 modules to help you manage your clients’ forms and file their returns all in one place.

Professional tax preparation software, like Intuit’s ProFile, can help tax preparers get all your clients’ income returns done accurately and efficiently. Find out for yourself why ProFile is Canada’s #1 best-selling professional tax software. Get your 14-day free trial today to improve your tax service this season.

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