Personal Finance

Line 42 on T3 Mutual Fund Tax Form

  • Last Updated:
  • Apr 21st, 2019 10:14 pm
[OP]
Sr. Member
Jun 14, 2009
566 posts
73 upvotes
Toronto

Line 42 on T3 Mutual Fund Tax Form

If one did not buy nor sell anything on the fund (Capital gains = 0, Line 21 in T3 is also 0.00), what is the line 42 on T3 form for? Is this just for record keeping purposes when I sell the mutual fund units in the future?

I noticed there's a number now in my line 42 T3 form whereas in the past, it used to be zero and I haven't bought nor sold any units since I opened the account. Granted, there were capital gains taxes in Line 21 before but zero in Line 42. Now, it's the opposite, zero in Line 21 (Capital Gains) and a number in Line 42...
20 replies
Deal Addict
User avatar
Feb 1, 2012
1539 posts
2229 upvotes
Thunder Bay, ON
Box 42 is for Return of Capital. It does not affect your tax return until you sell shares. It depends on what securities are held in the fund and can vary from year to year. You need to keep track of it and subtract it from you Adjusted Cost Base when you sell shares, otherwise you will under report your capital gain or overstate a capital loss. And because it is on your T3, CRA knows about it.

Here are some links that explain it in more detail.
https://www.adjustedcostbase.ca/blog/re ... cost-base/
https://www.theglobeandmail.com/globe-i ... cle547291/
I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.
[OP]
Sr. Member
Jun 14, 2009
566 posts
73 upvotes
Toronto
Deepwater wrote: Box 42 is for Return of Capital. It does not affect your tax return until you sell shares. It depends on what securities are held in the fund and can vary from year to year. You need to keep track of it and subtract it from you Adjusted Cost Base when you sell shares, otherwise you will under report your capital gain or overstate a capital loss. And because it is on your T3, CRA knows about it.

Here are some links that explain it in more detail.
https://www.adjustedcostbase.ca/blog/re ... cost-base/
https://www.theglobeandmail.com/globe-i ... cle547291/
Thanks Deepwater. I only own one mutual fund (for now) -- so does this accumulate or reduce and therefore I only keep track of one statement of account (Eg it's cumulative) or do they do this every year (eg I literally add or subtract every year until I completely dispose)? First time I've seen this hence I ask...

Net, if I don't sell anything for 10 yrs, I have to keep 10 yrs of T3 historical T3's or do I keep the latest T3's and ignore the rest? (and for goodness sake, why can't they use their computer systems to just keep track of this for us? LOL)... as well, for a day trader I guess he'll have to submit tons of paperwork to support his ACB's for his trading activity?
Deal Addict
User avatar
Feb 1, 2012
1539 posts
2229 upvotes
Thunder Bay, ON
The amount in Box 42 is specific to each year. You need to track the cumulative total yourself until you sell the fund.

Your bank or broker may track ACB or book value and display it on your statement and/or online interface. But you should track it yourself since the bank may not be accurate. I use TD Direct and I know their book value does not get updated for Return of Capital. Plus the government requires you to track ACB across all non-registered accounts in which you hold a security. So if you hold a stock or ETF in multiple accounts the brokers cannot possibly know what your ACB is.

AdjustedCostBase.ca is a good free website for tracking ACB.

Or if you do a web search for "ACB spreadsheet" you should find several.
I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.
[OP]
Sr. Member
Jun 14, 2009
566 posts
73 upvotes
Toronto
thanks deepwater... I can easily just track them it seems... what do i do with the Box 21 capital gains tax that I actually put in my tax form? do i track that too?

why do i ask this? it's because when i was reading this form/pamphlet -- https://www.canada.ca/content/dam/cra-a ... 69-18e.pdf -- the example shows capital gains being added (box 21, i presume) and then box 42 being reduced to his total fund... Eg $750 less $500 in the example... eg page 4 in the example (see footnote)

also, using that example, does this mean I keep track of cumulative box 21's (capital gains) and reduce cumulatively box 42's from the time i put money into the fund (eg thankfully i know exactly how much I disbursed to buy the fund since i used a check to buy them lol)... for example, if i put in 100k total (paid 100k) to buy the mutual fund, and then say after year 1 i had capital gains in box 21 of 10k and then in year 2 i have a 5k in box 42 in year 2 (and zero in box 21 in year 2's T3 form) -- does that mean my adjusted cost base is now $105k (eg $100k +$10k -$5k)... note that i never bought nor sold any shares from day 1 till end of year 2 just to make this example simple... or am i wrong? (so confusing, truth be told -- what more if one buys and sells in the fund, even more confusing, i guess lol)...
Deal Addict
May 16, 2017
1596 posts
2017 upvotes
T3s are applicable to Trusts. Trusts can distribute their dividends, capital gains, interest, other income to their unit holders (you).

The T3 capital gain is reported each year by you as a Capital Gain. (from box 21 of T3). Similarly there are other boxes for Dividends and Other Income that can be distributed to unit holders and are taxed every year.

Box 42 is for calculation of the Adjusted Cost Base (ACB) which is only needed when you actually dispose of your units in the Trust. You need to keep track of this every year until you sell the units. It has no tax implications until then.

Investment trusts do take more work and understanding.
[OP]
Sr. Member
Jun 14, 2009
566 posts
73 upvotes
Toronto
Thanks robsaw. Now Im truly confused, I have declared and paid taxes and capital gains from my T3 in the past but never got any dividends nor sold the fund shares. When I sell the fund later, am I not double taxing then?

For example, I apparently got x amount of dividends this year from the fund as shown in my t3 form this year, but I never really got the check for such dividends, how do I ensure I don't pay taxes again on such dividends (I presume this dividend was reinvested). Also, I had to pay capital gains tax as per t3 form, but I never disposed of any units. Do I have to adjust my cost base for these (dividends and capital gains) over and beyond what's noted in box 42 of the t3? Note that my dividends and capital gains added are way higher than box 42 in my t3... And yet I didn't get any $ for these...how do I calculate my ACB now?? Many thanks


PS to sum up, I never got a dividend check etc at all, yet I have amounts on my t3 form for this, how do I ensure I don't pay taxes on this again since I presume/hope this was reinvested. Do I include these dividends to adjust my cost base or do I just really really on box 42 (and nothing else). Same with capital gains, I never got anything yet I have an amount in my T3, so I presume that these were reinvested? And therefore need to include these for my ACB(over and beyond box 42)?
Deal Addict
User avatar
Feb 1, 2012
1539 posts
2229 upvotes
Thunder Bay, ON
Yes it is confusing, but after a few years the confusion will fade and it will just be tedious. If it helps, thinking of the new carbon tax will probably distract you from the pain of income tax reporting. :)

There are two different categories of tax items:
1) Your own buy and sell transactions. It sounds like you have bought units but never sold. These activities are described in the Tax Treatment of Mutual Funds for Individuals document in the paragraph titled "How do you calculate and report capital gains when you sell or redeem units or shares".
2) Taxable activity internal to the fund that you do not initiate. This includes distributions from the fund that you may choose to take in cash, or have reinvested into new units. It also includes items like return of capital, and capital gains when the fund sells securities. These activities are described in the Tax Treatment of Mutual Funds for Individuals document in the paragraph titled "How do you report income from information slips".

1) Buy & sell transactions you initiate that are not on a T3, but your broker will send them on a trading summary or T5008. These occur when you add cash to your account and buy new shares, or when you sell shares for cash. Buy transactions add to your total cost base, and may increase or decrease your average cost per share. Sell transactions will lower your cost base. These are the transactions you need to track in a spreadsheet or a website like adjustedcostbase.ca. Every time you sell a security like a stock, bond, mutual fund or ETF you need to report any capital gain or loss on Schedule 3 of your tax return which is why you need to track your adjusted cost base.

2) Internal fund transactions are things like dividends and interest from the fund's holdings, capital gains/losses when the fund sells securities, return of capital, and foreign taxes the fund paid. These are the items that are on the T3 slip, and appear in boxes 21, 26, 49, 50, 51, 23, 32, 25, 34. These items affect your taxes for the current reporting year. You just have to enter any T3 boxes your tax program asks for. You don't have to track them cumulatively. These items do not affect your cost basis. Capital gains in box 21 occur when the fund sells a security and incurs a capital gain (i.e you did not sell anything, the fund did internally). Just plug that amount into the T3 form in your tax program (It does not affect your Adjusted Cost). The only box on the T3 that does not work that way is Box 42, which you need to subtract from your Adjusted Cost Base.

You say you never get paid any cash distributions, so it sounds like your distributions are being reinvested. If distributions are paid in cash you will see the cash value in your account go up and periodic transactions labeled Dividend or Distribution. If they are reinvested you will see the number of units held go up over time and transactions labeled something like Dividend Reinvestment Plan or DRIP. With a DRIP, every time there is a reinvested distribution you should add this to your Adjusted Cost Base. That is how you avoid being double taxed on the distributions when you sell. Essentially the fund is paying a cash distribution that appears on your T3 as dividends or foreign income and is taxed in the year it is received, then the fund reinvests that cash into new units which you add to your Adjusted Cost Base.

To summarize, When you buy new units add them to your Adjusted Cost Base. When you have distributions reinvested, add that to your Adjusted cost base (your investment statements should list the number of shares added and the total cost of those shares or the cost per share). When you get your T3, go to your tax program and transcribe any values it asks for from the boxes on your T3. (The tax program may not require all the boxes from the T3 you receive.) Subtract any amount in Box 42 from your Adjusted Cost Base. If you have cash distributions, you can ignore them from a tax perspective since they are included in the boxes on your T3. When you sell shares, subtract the proceeds of disposition from your Adjusted Cost Base.

Also are your RRSP and TFSA maxed out? They are generally more tax-efficient than non-registered accounts, so you should propably ensure you have invested your maximum in those before opening a non-registered account.


for example, if i put in 100k total (paid 100k) to buy the mutual fund, and then say after year 1 i had capital gains in box 21 of 10k and then in year 2 i have a 5k in box 42 in year 2 (and zero in box 21 in year 2's T3 form) -- does that mean my adjusted cost base is now $105k (eg $100k +$10k -$5k)... note that i never bought nor sold any shares from day 1 till end of year 2 just to make this example simple... or am i wrong?
Box 21 is internal transactions in the mutual fund. It is reported as taxable capital gains for the year it is received. It does not affect cost base. Report it on the T3 form in your tax program. Box 42 is also a taxable amount internal to the mutual fund that you subtract from your ACB. So ACB = $100k - $5k = $95k.


I apparently got x amount of dividends this year from the fund as shown in my t3 form this year, but I never really got the check for such dividends, how do I ensure I don't pay taxes again on such dividends (I presume this dividend was reinvested).
You pay tax on the dividends in the year they are received by reporting the amount from your T3. Then when the dividends get reinvested you add that amount to your cost base. That ensures when you sell you don't get taxed on the dividends again.

I find it's easiest to use adjustedcostbase.ca to track this info, and their help section (in the blog) is really good. If you worry about the site shutting down it lets you download transactions to a spreadsheet format. I do that yearly.
I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.
[OP]
Sr. Member
Jun 14, 2009
566 posts
73 upvotes
Toronto
Thank you very much for the comprehensive explanation. It is clearer now. I'll use the spreadsheet link you recommended to track my ACB. Yes your statements are what I did:
A) I only bought units but have not had any redemptions - I didn't get a T5008 after I bought shares, only a statement of account from RBC investor and treasury service showing I purchased

b) I guess given my situation, I only keep track of Box 42 for my ACB? I noticed my statement shows that units went up (even if I didn't personally send cash to buy them), do I need to adjust my cost base? It does seem.like my statement adjusted it accordingly... Though I'm not 100%. I guess I'll have to do 3 yrs *4 qtrs =12 adjustments? Given that I opened the fund in Jan 2016 and have received (and thankfully kept) 12 statements of accounts lol

C) once I get to the end of b) - adjusting my cost base, I subtract box 42 to get my "latest" cost base?

D) what if there is a discrepancy between RBC investor and treasury service acb and mine, how does one proceed? They did say they report my ACB to the CCRA in my statement of account... So do i follow their number?? The exact wording is this: "if you held any of the same investments outside this account, your tax cost for purposes of determining your gain or loss must be calculated for your combined holding on a weighted average cost basis. You may need to adjust the figures reported in the statement to account for additional holdings, when calculating the gain or loss to be reported on your tax return". * All transaction on this statement will be disclosed to ccra this year. These transactions must be reported on your annual income tax return.

Then I see also adjusted cost base number... So what if I can get to their number? What do I use?

Fwiw in my statement is also has fund name, book cost, average cost, unit balance, unit price, market value... The book cost is higher than the amount I bought eg I paid 100k but book cost says 117+k... Then average cost is just that divided by unit balance, it seems...
So
Many thanks
Member
May 24, 2018
464 posts
291 upvotes
Ontario
eilrach wrote: ...
Fwiw in my statement is also has fund name, book cost, average cost, unit balance, unit price, market value... The book cost is higher than the amount I bought eg I paid 100k but book cost says 117+k... Then average cost is just that divided by unit balance, it seems...
So
For me, I will do a seach on past statements (monthly? quarterly?) to identify when the book cost changed.
Then look more details at the transactions posted on that statement. It usually (but not always) will give a satisfactory explanation.
As Deepwater explained, it may be a transaction you did not initiate.
[OP]
Sr. Member
Jun 14, 2009
566 posts
73 upvotes
Toronto
hwyc2007 wrote: For me, I will do a seach on past statements (monthly? quarterly?) to identify when the book cost changed.
Then look more details at the transactions posted on that statement. It usually (but not always) will give a satisfactory explanation.
As Deepwater explained, it may be a transaction you did not initiate.
Thanks hwyc... actually in my case, i never initiated any transactions as i never redeemed and got anything in the mail, in check etc... in short, everything is done by the mutual fund manager... then reinvested... my average cost is exactly book cost (total) divided by number of units... net since i didnt do anything at all in this fund, i would presume that my average book cost is the correct case, it seems... (eg i put in 100k but now my book cost is 117+k... i never got nor put in any $ since i opened the account in the last 3 yrs)

what im truly more concerned is if there's a discrepancy in my book cost that i computed (eg by hand/by computer at home) vs the mutual fund's computation, who do i use? considering that i havent done anything in the fund, i would presume i might be incorrectly computing something? i have looked at my past 12 statements and they do add up eg book then reinvest then my units went up along with my book cost, etc etc...
Member
May 24, 2018
464 posts
291 upvotes
Ontario
eilrach wrote: ...
what im truly more concerned is if there's a discrepancy in my book cost that i computed (eg by hand/by computer at home) vs the mutual fund's computation, who do i use? considering that i havent done anything in the fund, i would presume i might be incorrectly computing something? i have looked at my past 12 statements and they do add up eg book then reinvest then my units went up along with my book cost, etc etc...
. . . Looks like your investment is a mutual fund and you opt for DRIP (distribution reinvestment plan)
In that case, I can only re-iterate what other people already suggested - that you keep a spreadsheet on the side, do you own calculation perhaps once a year and check if your results agreed with what's printed on the statements. If there is a deviation, you don't want to wait 40 years (or when you sell), then start to look back.

It is a learning journey, you are not alone.
[OP]
Sr. Member
Jun 14, 2009
566 posts
73 upvotes
Toronto
Yep, i guess just keep track. The question now then becomes, what to do if it's different? Just call for explanation? And have them change? Wondering if someone's been able to do that or what process one does since if they made the error, then they have to correct it otherwise your CCRA submission versus their submission will not be the same?

Thanks!
Deal Addict
User avatar
Feb 1, 2012
1539 posts
2229 upvotes
Thunder Bay, ON
A) you will only get a T5008 when you sell units.

B) The ACB gets updated every time you acquire or sell units, even it the new units are from reinvested distributions. Think of reinvested distributions as 2 transactions combined. First is a cash distribution. Second is getting new units with that cash. So yes, reinvested distributions get added to your ACB

C) Subtract RoC from your ACB: Yes

D) Your calculation for ACB and the broker's should be the same. If they are different you should check your numbers and determine why. For each reinvested distribution there should a transaction on your statement saying # of units and $ value of the reinvestment. I would compare your ACB (or book value per share) vs RBC after the first reinvested distribution then every subsequent one looking for any difference, and especially if it grows over time.

I know my broker (TD Direct) does not include Return of Capital in their ACB calculations. I keep my own calculations and if CRA ever asks I could explain the difference. IMO not very likely they would but you never know.
"if you held any of the same investments outside this account, your tax cost for purposes of determining your gain or loss must be calculated for your combined holding on a weighted average cost basis. You may need to adjust the figures reported in the statement to account for additional holdings, when calculating the gain or loss to be reported on your tax return"
That statement only applies if you also held the same mutual fund in other brokerages or banks. If you hold in multiple accounts there is no way any one broker can know your ACB.

The book value will be higher than your original cost by the amount of the reinvested distributions.

Probably a lot of people never bother with this stuff and just use the broker's numbers. I track it on my own because a) I know my broker omits RoC from their calculations, and b) it's easier to track in a spreadsheet than having to look back at all the statements if ever I get audited.
I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.
Member
May 24, 2018
464 posts
291 upvotes
Ontario
eilrach wrote: ... The question now then becomes, what to do if it's different? Just call for explanation? And have them change? Wondering if someone's been able to do that or what process one does since if they made the error, then they have to correct it otherwise your CCRA submission versus their submission will not be the same?

Thanks!
I would take these steps to reconcile -
(1) Call for explanation sounds good, if you calculated different cost while reviewing your statements ( e.g. during the routine checkup ). No T5008 is issued before you sell, so CRA will not be involved.
(2) When you sold (in whole or partially), you should expect a T5008 for the transaction. Refer to a note regarding Box 20 - Cost or book value here.

Note - Cost or book value is the initial outlay or price paid or payable for a particular security or debt investment. The preparer is expected to take reasonable measures in order to ensure that the amount reported in box 20 is correct. Do not enter the market value or the current price the asset was sold for in box 20. The investor needs this amount to calculate the adjusted cost base (ACB) of the security or debt investment and to track gains (or losses).

This amount may or may not reflect the investor's ACB for the purpose of determining his or her gain or loss from the disposition of the security. The investor should be aware that they may have to make adjustments to the amount indicated in box 20 at the time of determining and reporting their gain or loss from the disposition


In a nutshell, the investor is to review & make the adjustment he deemed necessary to the cost when filing his tax with CRA.
No need to go back to the T5008 preparer.
That would be my understanding regarding the process.
[OP]
Sr. Member
Jun 14, 2009
566 posts
73 upvotes
Toronto
Thanks Deepwater and hwyc!!! got it finally!!! all clear now... whew! what confusing endeavor... esp since I didnt realize i was invested in a trust lol. these guys keep structuring things differently lol (so my heading is actually incorrect, it's not a mutual fund per se...)
Newbie
Oct 9, 2014
18 posts
4 upvotes
If you sell a relatively small partial amount of units annually, should we be calculating the ACB each year for box 20 using the T3 Box 42 amount, or can we choose to ignore box 42 until all the units are sold in the future and apply the cumulative amount then?
I just took over a parent's taxes from an accountant who I don't think was applying it (I'm no expert but he made silly costly mistakes in the past, so I decided to take over and learn). I have no historic spreadsheet, so I'm going to have to dig up old T3s.
Deal Addict
User avatar
Feb 1, 2012
1539 posts
2229 upvotes
Thunder Bay, ON
s021TO wrote: If you sell a relatively small partial amount of units annually, should we be calculating the ACB each year for box 20 using the T3 Box 42 amount, or can we choose to ignore box 42 until all the units are sold in the future and apply the cumulative amount then?
I just took over a parent's taxes from an accountant who I don't think was applying it (I'm no expert but he made silly costly mistakes in the past, so I decided to take over and learn). I have no historic spreadsheet, so I'm going to have to dig up old T3s.
Note this only applies in non-registered accounts. It's not necessary in registered accounts like TFSA, RRSP, RRIF etc.

Every time you sell shares you need to declare your capital gains on Schedule 3. (Or if you have a capital loss you can carry them back 3 years or forward indefinitely.)

To do that you have 2 options:
1) Trust your broker and use the average cost per share and/or book value from your statements or web interface. It will probably be right as long as you have only held the security in one account at one broker. If you have transferred shares between brokers your broker may not have the right cost. And if you held the shares in more than one broker account then you have to calculate your adjusted cost manually, since your brokers cannot possibly view your cost across multiple accounts

2) Keep your own running calculation for adjusted cost. Every time you sell you need to update your ACB including all buy, sell or reinvested distribution transactions. And every year you need to subtract RoC (T3 Box 42) from your ACB. (The easiest way is to keep an up-to-date log).

No you cannot just ignore box 42 if you sell small amounts. IME it's usually a small dollar value, but you decide if you want to risk playing fast and loose with CRA.

When you say Box 20 is that on a t5008 Cost or Book Value field? Many banks or brokers will leave that box blank. But if it's filled in, there's probably minimal risk from using it (subject to my comments above regarding only holding the security at one brokerage).

Hope this helps.
I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.
Deal Fanatic
User avatar
Nov 19, 2004
8934 posts
1870 upvotes
Cambridge, ON
s021TO wrote: If you sell a relatively small partial amount of units annually, should we be calculating the ACB each year for box 20 using the T3 Box 42 amount, or can we choose to ignore box 42 until all the units are sold in the future and apply the cumulative amount then?
I just took over a parent's taxes from an accountant who I don't think was applying it (I'm no expert but he made silly costly mistakes in the past, so I decided to take over and learn). I have no historic spreadsheet, so I'm going to have to dig up old T3s.
Box 42 affects your ACB. You need to recalculate every year. Each time you sell, the ACB will be different due to box 42. It is return of capital which is lowering your ACB which in turn increases your capital gains. Each time you sell, you have to determine your capital gains for taxes.
Deal Fanatic
User avatar
Feb 19, 2010
6237 posts
2968 upvotes
Not that BMO Investorline hasn't been problematic for me at times but their reporting on capital dispositions does indeed capture the ROC and properly reflects the ACB for dispositions. I have yet to find an example where it has not been correct so at this point I don't even bother checking any more.

This is actually a very good report. It's under My Portfolio>Realized Gain Loss and can be downloaded as a spreadsheet or a PDF and is an excellent tool for tax preparation. One does need, however, to do the foreign exchange calculations as required.

Top