Tax slips arrive in February and March. You enter the numbers in your tax software, hit submit, and move on. But if you don't understand what you're entering, you can make errors that cost you money — or trigger a CRA letter years later.
This guide covers every significant box on the T3 and T5 slips, why index fund holders get them, what the foreign income boxes mean, and the most common mistakes Canadians make when filing these slips.
T3 Slip: Trust Income
A T3 slip (Statement of Trust Income Allocations and Designations) reports income that flows through to you from a trust. In the investment context, trusts include:
- Canadian ETFs (structured as mutual fund trusts)
- Canadian mutual funds structured as trusts
- REITs (Real Estate Investment Trusts)
- Income trusts
- Estate distributions
If you hold any ETF or mutual fund trust in a non-registered (taxable) account, you'll receive a T3 for each holding annually — even if you didn't buy or sell any units during the year.
T3 Box Reference
Box 21 Capital Gains: Why They Appear Even on Index Funds
This confuses many investors. You hold XIC (iShares Core S&P/TSX ETF). You didn't sell a single unit all year. Then your T3 shows Box 21 capital gains of $300. Why?
ETFs and mutual fund trusts are required to distribute all net capital gains realized inside the fund to unit holders annually. During the year, the fund manager may have sold some underlying securities to rebalance the portfolio (a company left the index, a merger happened, index reweighting occurred). Those internal sales generate capital gains inside the fund. The fund distributes those gains to all unit holders as of the distribution date — and you're one of them.
The result: you owe tax on those distributed capital gains even though you never pressed sell yourself. This is one reason index investing inside an RRSP or TFSA is more tax-efficient than in a non-registered account — these internal distributions are sheltered.
The ACB impact of T3 distributions: When you receive capital gains and income distributions from a mutual fund trust, these don't reduce your Adjusted Cost Base (they're passed out as cash or reinvested). However, Return of Capital (Box 42) distributions do reduce your ACB. Every year you receive ROC from a REIT or income-focused fund, your ACB per unit decreases by that amount. If you ignore this and sell later, you'll miscalculate your capital gain.
Box 25: Foreign Income on Your T3
If you hold an ETF that owns international stocks (like XEQT, VEQT, XAW, or VXC), the foreign dividends received by the ETF flow through to you as "foreign income" in Box 25. This income is fully taxable at your marginal rate — unlike Canadian eligible dividends, there's no dividend tax credit for foreign dividends.
Box 26 shows the foreign taxes withheld before the income arrived in the fund. You can claim Box 26 as a foreign tax credit on line 40500 of your T1 return, which reduces your Canadian tax on the same income. Your tax software handles this automatically if you enter Box 26 in the correct field.
The maximum credit you can claim is limited to the Canadian tax that would apply to the same income. If you're in a low bracket, you may not be able to claim the full foreign withholding — this is part of why holding international ETFs in an RRSP (where the withholding is already minimized through different mechanisms) is preferred. See the foreign withholding tax guide for the full breakdown.
T5 Slip: Investment Income
A T5 slip (Statement of Investment Income) reports income paid directly from corporations and financial institutions to you as an investor. Unlike T3s (trust income), T5s come from:
- Canadian corporations paying dividends (TD bank, Enbridge, etc.)
- Banks and credit unions paying interest on savings accounts, GICs, and bonds
- Mutual fund corporations (different structure from mutual fund trusts)
- Foreign corporations paying dividends if held directly
T5 Box Reference
T5 threshold: Financial institutions are only required to issue T5 slips if the total investment income is $50 or more during the year. If you earn $40 in interest from a savings account, you may not receive a T5 — but you're still legally required to report that income. Check your account statements and report it anyway.
Why Index Fund Investors Get T3 Slips
This surprises many passive investors: "I just hold XEQT and never trade. Why do I get a T3?" Three reasons:
1. Annual capital gains distributions
As explained earlier, the ETF sells securities internally throughout the year (index rebalancing, corporate events). Net gains are distributed to unitholders. Box 21 on your T3 reflects your share of these internal gains.
2. Dividend and interest pass-throughs
The ETF collects dividends and interest from its underlying holdings. These flow through to you as T3 income (Box 49/50 for eligible dividends, Box 25 for foreign income).
3. Reinvested distributions (phantom income)
Some ETFs offer DRIP (dividend reinvestment plans). When a distribution is reinvested, you still owe tax on the distribution — but the cash never left the account. This is "phantom income": you pay tax on money that was immediately reinvested. The upside is your ACB increases by the reinvested amount, so you'll have a smaller capital gain when you eventually sell.
Inside RRSP, TFSA, and FHSA: None of this matters. ETFs inside registered accounts generate no T3 or T5 slips — all the internal distributions, capital gains, and income are sheltered. This is a major reason to hold index ETFs inside registered accounts when possible.
Common Mistakes Canadians Make with T3 and T5 Slips
1. Forgetting to claim slips that arrive late
T3 slips from trusts can arrive as late as March 31 — after many people have already filed their taxes. A slip arriving April 1 that you've already submitted without is a problem. Either wait until you have all slips before filing, or file a T1-ADJ (adjustment request) after receiving late slips. The CRA cross-references slips to returns — a missing slip usually triggers a reassessment.
2. Double-counting DRIP distributions
If your ETF reinvests distributions and you also receive a T3, you must claim the T3 income — even though the cash was reinvested. You cannot skip it because "I didn't receive the cash." The T3 income is still your income regardless of reinvestment. However, if you manually track distributions and already counted them in your ACB, make sure you're not also adding the T3 gross amount to your income — you want the T3 income on the return, and the reinvestment adds to ACB. Your tax software handles this correctly if you enter the T3 slips properly.
3. Missing the ROC ACB adjustment (Box 42)
Return of capital in Box 42 of the T3 is not income — you don't put it on your tax return. But you must reduce your ACB by the ROC amount each year. Miss this for five years of REIT distributions and your ACB will be wrong when you sell. The capital gain will be overstated. This is money you paid extra tax on unnecessarily. Track it with a spreadsheet or use AdjustedCostBase.ca.
4. Forgetting foreign tax credit claims
Box 26 on T3 and Box 16 on T5 (foreign taxes paid) are credits — they reduce your tax. Many taxpayers skip these, paying full Canadian tax on income that was already partly taxed abroad. Your tax software will prompt you for these if you enter the boxes properly — but if you manually skip the foreign boxes, you lose the credit.
5. Not entering T3 slips at all because "it's just an index fund"
A common shortcut: "I held XEQT all year, didn't trade, the T3 is just administrative noise." The T3 is not noise — it's reportable taxable income. Entering $300 in Box 21 means you owe tax on $150 of it (50% inclusion). Skipping it means you've underreported income. CRA receives copies of all T3 slips and matches them to returns.
For the full picture on how ETF distributions work and how to track ACB across a portfolio, see the mutual fund and ETF tax guide and the guide on ACB tracking for dividend investors.
T3 vs T5: A Quick Reference
Which slip comes from which investment?
T3: ETFs (mutual fund trusts), mutual funds (trust structure), REITs, income trusts, estate distributions
T5: Canadian bank dividends, GIC/savings account interest, bonds, mutual fund corporations, directly held foreign stocks
T5008: Not covered here, but this slip reports proceeds of disposition (when you sell). Used to verify capital gains calculations — you still need to calculate the gain using your ACB.