For U.S. and other non-resident tax information, please refer to the Non-resident Tax Information below.
Canadian Oil Sands Trust (the “Trust”) is treated as a mutual fund trust for purposes of the Canadian Income Tax Act. Each year the Trust files an income tax return and allocates all its taxable income to its Unitholders with the result that its income is taxable in the hands of its Unitholders. Distributions paid by the Trust are both a return of capital (i.e. a repayment of a portion of your investment) and a return on capital (i.e. taxable income). The allocation between these two streams is dependent upon the tax deductions that the Trust is entitled to claim against the income it earns from royalties, interest and dividends received from Canadian Oil Sands Limited (the operating company) and income the Trust earns directly.
Each year the taxable income portion and return of capital, is calculated and reported in the Trust's T3 return and allocated to each Unitholder who received distributions in that taxation year on the T3 Summary Form, which is mailed out before March 31st. The T3 slip will report only taxable amounts, which are classified and shown as other income (royalty and interest) in box 26, or dividends in box 23. Historically, the portion of the Trust's distributions that were considered taxable has all been classified as "other income".
The tax deferred, or return of capital, portion reduces a Unitholder's adjusted cost base ("ACB") of units and is reported in Box 42 of the T3 slip.
Units held within a RRSP, RRIF or DPSP
For trust units held in non-taxable accounts such as Registered Retirement Savings Plans (RRSP), Registered Retirement Income Funds (RRIF), or Deferred Profit Sharing Plans (DPSP), income earned on the trust units is generally not subject to taxation during the year. The amount of capital and any earnings in the plan are typically taxed only on withdrawal from the plan.
Units held outside an RRSP, RRIF or DPSP
Unitholders who hold trust units outside a RRSP, RRIF or DPSP and received one or more cash distributions during the calendar year will be issued a T3 Summary Form indicating the portion of cash distributions to be reported as taxable "Other Income" or “Dividends” and the portion which is a return of capital. T3 slips are mailed in the month of March. Unitholders will receive the T3 slip from their brokerage firm if the units are registered in street form and directly from Computershare Trust Company of Canada, the Trust’s registrar and transfer agent, if the Units are registered in the Unitholder’s name.
Adjusted Cost Base ("ACB") Reduction
ACB is used in calculating capital gains or losses in respect of trust units held as capital property by a unitholder on the disposition of the units. A Unitholder must generally average the cost of all Units to determine ACB. Unitholders are required to reduce the ACB of their Units by the amount of any distributions received as returns of capital (i.e. the tax-deferred portion of distributions received).
Capital gains from the disposition of Units will be equal to proceeds of the sale of the Units less the ACB of the Units and any reasonable costs of disposition. Additionally, should a taxpayer's ACB be reduced to below zero during a taxation year, an immediate disposition is deemed to have occurred and the negative amount is deemed to be a capital gain. The ACB is then reset to zero. Capital gains are reported by a Unitholder on schedule 3 of the T1 Income Tax Return.
Example:
An investor purchased a unit of the Trust for $35.00. During the time the investor held the units, the Trust paid distributions totaling $2.00. These distributions were comprised of $1.21 taxable income and $0.79 tax-deferred return of capital. The $1.21 taxable portion is taxable as other income in the year it was received whereas the $0.79 tax-deferred return of capital would not be taxable in that year. This amount reduced the ACB of the trust unit to $34.21. If the investor then sold the Unit for $38.00, a capital gain of $3.79 would result ($38.00 -$34.21).
Purchase price = $35.00
Total distributions received during the year = $2.00
Distribution comprised of:
Taxable income = $1.21
(reflected as “Other Income” on T3 Summary Form)
Tax deferred return of capital = $0.79
(tax-deferred and reported in box 42 of T3 Summary Form)
ACB Reduction
Purchase price = $35.00
Less: Tax deferred - $0.79
= $34.21
Sales price = $38.00
Less: ACB of $34.21
Resulting Capital Gain = $3.79
(must be reported on Schedule 3 of T1 Income Tax Return)
U.S. AND OTHER NON-RESIDENT TAX INFORMATION
Unitholders who are non-residents of Canada for Canadian income tax purposes are encouraged to seek advice from a qualified tax advisor in your country of residence for the tax treatment of distributions. Distributions payable to non-residents of Canada are normally subject to a withholding tax of 25% as prescribed by the Income Tax Act of Canada. However, the withholding tax for residents of the United States is prescribed at 15% in accordance with a reciprocal tax treaty between Canada and the United States. U.S. taxpayers may be eligible for a foreign tax credit with respect to the Canadian withholding taxes paid. Other jurisdictions may also have reciprocal tax treaties that would reduce the withholding tax rate.
As Canadian Oil Sands Trust has not made an election to be treated as a partnership for U.S. tax purposes, we believe we are considered a corporation for U.S. tax purposes with a portion of the distributions paid by the Trust qualifying as dividends for U.S. tax purposes. In the instance of a U.S. Unitholder, the taxable portion of the distribution for U.S. tax purposes is determined by the Trust based upon current and accumulated earnings determined in accordance with U.S. tax law. Information detailing distributions paid and the taxable portion for U.S. purposes is posted on our Web site after the end of each year.
The non-taxable portion of the cash distribution is treated as a reduction of cost base for purposes of computing gains or losses on disposition of a Unit. Once the full amount of the cost base has been recovered, any additional non-taxable distributions should generally be reported as capital gains.
For U.S. residents, the income tax laws of the United States apply.
The above information is not intended to be, and should not be construed to be, legal or tax advice to any Unitholder. Unitholders should obtain independent advice regarding the income tax consequences of their investment.
Please refer to Distributions, Canadian Summary and U.S. Summary for more detailed information.
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