If you’re a business owner in Canada responsible for paying dividends or other forms of investment income, it’s essential to understand how to prepare a T5 tax slip. The T5, or Return of Investment Income, is a key document that must be filed with the Canada Revenue Agency (CRA) to report these payments. This guide is designed for small business owners, accountants, and anyone managing corporate finances. You’ll gain a comprehensive understanding of how to prepare a T5 tax slip, including identifying the types of income that need to be reported, meeting important deadlines, and avoiding penalties.
What is the T5 Tax Slip?
A T5 tax slip, officially referred to as the “Return of Investment Income” by the Canada Revenue Agency (CRA), is used to report payments made to individuals from corporations. These payments may include:
– Eligible and non-eligible dividends (including most deemed dividends)
– Interest from sources such as:
– Fully registered bonds or debentures
– Money loaned to, deposited with, or property placed with a corporation, association, organization, institution, partnership, or trust
– Accounts with investment dealers or brokers
– Insurance policies/ annuity contracts (when an insurer pays the interest)
– Amounts that must be included in a policyholder’s income under section 12.2 of the Income Tax Act
– Amounts distributed from an eligible funeral/memorial arrangement (Box 14 – Other income from Canadian sources)
– Royalties from the use of a work, invention, or production rights from natural resources
– Various blended income payments and capital made by a corporation, association, organization, institution, partnership, or trust
– Interest deemed to accrue under subsection 20(14.2) of the Income Tax Act due to the assignment or transfer of linked notes (see Box 30)
– The most common payments reported on a T5 slip are dividends, which are distributions of profits earned by a company and paid out to its shareholders.
Issuing T5 Slips
T5 slips are prepared and issued by the company or financial institution responsible for paying dividends or managing investment accounts. If an individual receives more than $50 in investment income, the entity will issue a T5 slip to report the earnings. If you are a business owner, you are responsible for issuing T5s to shareholders who receive investment income from your company. Individuals with multiple investment sources or accounts will receive separate T5 slips for each entity.
Filing Deadlines and Penalties
The deadline for issuing T5 slips is February 28th each year, covering the previous calendar year (January 1 to December 31), regardless of the company’s fiscal year-end. It is essential for shareholders to receive their T5 slips on time, as they need this information to complete their personal T1 tax returns, which are due in April. Failure to meet the T5 filing deadline can result in penalties, including:
– Unreported income penalty: the lesser of 10% of the unreported amount or 50% of additional tax owed.
– Late filing penalty: a minimum of $100, with the amount increasing based on the number of slips required.
These penalties apply to the individual or organization responsible for filing the T5.
Preparing the T5 Slip
Before completing the T5, it’s important to correctly identify what constitutes a dividend. For example, shareholder loan repayments or payroll should not be reported as dividends. Any unreimbursed expenses paid by a shareholder on behalf of the company should reduce the total dividend amount. For instance, if a shareholder paid $10,000 for equipment and took out $100,000 from the company account, the net dividend would be $90,000.
Understanding GRIP and Dividend Types
The General Rate Income Pool (GRIP) balance plays a crucial role in determining the type of dividends paid. GRIP represents eligible dividends received by the company and business profits exceeding $500,000 annually. Eligible dividends paid from the GRIP account are taxed at a lower rate than ineligible dividends. Therefore, calculating the GRIP balance is essential to minimize taxes, especially for dividends exceeding $500,000.
Table 1: Tax Calculation
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|
|
Average Tax Rate |
Taxes Paid |
||
|
Income |
Type of Dividend |
Ontario |
Quebec |
Ontario |
Quebec |
|
$80,000 |
Eligible Dividend |
38.92% |
39.76% |
$31,136 |
$31,808 |
|
$80,000 |
Ineligible Dividend |
47.32% |
48.35% |
$37,856 |
$38,680 |
For example, consider a painter who owns a business and earns $800,000 in dividends. Here’s how they would complete their T5 slip:
Table 2: Calculation of ineligible dividend
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– Eligible Dividends: Profits exceeding $500,000 – $800,000 – $500,000 = $300,000 Calculation: – Taxable Eligible Dividends: Eligible dividends are grossed up by 38% – $300,000 × 1.38 = $414,000 – Dividend Tax Credit for Eligible Dividends: A tax credit for eligible dividends is 15.0198% – $414,000 × 0.150198 = $62,181.97 |
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– Dividends Other Than Eligible Dividends: Dividends from profits under $500,000 – $500,000 Calculation: – Taxable Dividends Other Than Eligible Dividends: These are grossed up by 15% – $500,000 × 1.15 = $575,000 – Dividend Tax Credit for Dividends Other Than Eligible Dividends: Tax credit for ineligible dividends is 9.0301% – $575,000 × 0.090301 = $51,923.01 |
This credit can be claimed on a personal tax return to reduce taxes payable.
Example B: Doctor or Lawyer’s T5 Slip
A doctor/Lawyer who owns their practice earns $200,000 in dividends. Here’s how the T5 slip would be filled out:
Table 3: Calculation of ineligible dividend
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– Actual Eligible Dividends: Since the above professionals’ profits are below $500,000, there are no eligible dividends. (see the above example for eligible dividends) – Taxable Eligible Dividends: The gross-up and tax credit system applies a 38% gross-up rate for eligible dividends, but it doesn’t apply in this case. N/A – Dividend Tax Credit for Eligible Dividends: Since there are no eligible dividends, this is also not applicable. N/A – Actual Dividends Other Than Eligible Dividends: These are dividends from profits under $500,000. = $200,000 – Taxable Dividends Other Than Eligible Dividends: This is calculated by multiplying the actual dividends by 1.15. – $200,000 × 1.15 = $230,000 – Dividend Tax Credit for Dividends Other Than Eligible Dividends: This is calculated by multiplying the taxable amount by 9.0301%. This credit can be claimed on the personal tax return to reduce taxes payable. – $230,000 × 0.090301 = $20,769.23 |
The T5 slip would reflect these amounts, focusing on non-eligible dividends. Other categories, such as “Interest from Canadian Sources” and “Capital Gains Dividends,” are typically filed by financial institutions for investment accounts, and do not usually apply to business owners.
Steps to Complete the T5 Slip
Once all calculations are ready, follow these steps:
1. Input the recipient’s name and address (i.e., the shareholder’s details).
2. Input the corporation’s name and address.
3. Determine the dividend type:
– Record eligible dividends in Box 25.
– Record non-eligible dividends in Box 10.
4. Calculate the taxable dividend based on the formulas outlined above.
5. Calculate the dividend tax credit based on the relevant formulas.
If you need to complete multiple T5 slips, you will also need to file a T5 Summary for your entire business. This summary includes the total amounts from all T5 slips issued. Make sure the form includes the reporting year and your business number.
Ensure that all details are accurate and correctly reflect the corporation’s financial activity. If you need help filling out the slip, you can refer to previous resources or blogs that offer detailed guidance.
How to File the T5 Slips using CRA My Business Account
Once the T5 slip(s) and summary are complete, submit them through the CRA’s MyBusiness Account portal. Filing online is quick and ensures that your T5 is submitted on time, helping to avoid potential penalties.
By following these steps, you can accurately and efficiently prepare a T5 slip, stay compliant with CRA requirements, and avoid unnecessary penalties. If you have any questions regarding how to complete the T5 slip or summary, feel free to reach out to us.