Understanding Your T4PS Slip: Why You Owe Tax on Money You Haven’t “Received”

Receiving a T4PS slip (Statement of Employee Profit-Sharing Plan Allocations and Payments) can be a source of confusion for many Canadian employees. Unlike a standard T4 slip, which represents the money that actually landed in your bank account, a T4PS often reports income you haven’t “seen” in cash.

This guide provides a deep dive into the mechanics of the T4PS, explaining why you owe taxes on money you haven’t received, how dividends and foreign tax credits work, and what happens to that money within your investment account.

1. What is a T4PS Slip?

An Employee Profit-Sharing Plan (EPSP) is a type of arrangement where an employer shares profits with its employees. These profits are held in a trust. According to the Canada Revenue Agency (CRA), when the trust allocates income to you, it is considered taxable in the year of allocation—regardless of whether you withdrew the cash.

The T4PS slip is the document that tracks these allocations. It breaks down the “flavor” of the income—whether it’s regular profit-sharing, capital gains, or Canadian dividends.

2. Decoding the Box Numbers: A Detailed Breakdown

To file your taxes accurately, you must understand what each box represents. These numbers dictate how much tax you pay and, more importantly, what credits you can claim to lower that bill.

Box 24: Actual Amount of Dividends (Non-Eligible)

This represents the actual cash value of dividends received by the trust from Canadian corporations that are typically small businesses (CCPCs). While this is the “real” amount, it is not the amount you are taxed on.

Box 25: Taxable Amount of Dividends (Non-Eligible)

In Canada, dividends are “grossed up.” This means the CRA adds a percentage (usually 15% for non-eligible dividends) to the actual amount. You are taxed on this higher “grossed-up” figure. The logic is that the corporation has already paid some tax, and the gross-up helps integrate the corporate and personal tax systems.

Box 26: Dividend Tax Credit for Non-Eligible Dividends

Because you are taxed on a grossed-up amount (Box 25), the government gives you a credit back. This credit reduces your total tax payable. Never ignore this box—it is essential for reducing the “phantom” tax burden.

Box 31: Taxable Amount of Eligible Dividends

“Eligible” dividends usually come from large, public Canadian corporations. These have a higher gross-up (38%) but also offer a much larger tax credit because the corporation paid a higher tax rate initially.

Box 35: Other Employment Income

This is the “catch-all” box for the employer’s actual profit-sharing contributions that aren’t classified as dividends or gains. It is treated as regular income, similar to your salary.

Box 37 & 39: Foreign Non-Business Income and Foreign Tax Paid

If your profit-sharing plan holds international stocks (like U.S. tech giants), you will see amounts here.

• Box 37 is the income earned outside Canada.

   

• Box 39 is the tax already withheld by that foreign country.

3. The “Phantom Income” Dilemma: Why Do I Owe Tax on Money I Don’t Have?

The most common question regarding a T4PS is: “Why am I paying tax on $2,000 in dividends when my bank account didn’t grow by a single cent?”

This is known as “Phantom Income.” In an EPSP, the trust acts as a pass-through. The moment the trust receives a dividend or a contribution from your employer and assigns it to your name, the CRA views it as your income.

Why does the CRA do this? The CRA wants its share of the tax at the moment the wealth is created for you. However, there is a significant long-term benefit: Tax-Paid Capital. Because you are paying the tax today, the “cost base” of your investment increases. When you eventually withdraw that money five, ten, or twenty years from now, you won’t be taxed on it again. You are essentially “pre-paying” your taxes so the money can grow tax-free (on the principal) thereafter.

4. Foreign Tax Credits: Avoiding Double Taxation

If your T4PS shows an amount in Box 39 (Foreign Tax Paid), you are dealing with a Foreign Tax Credit (FTC).

When a Canadian trust holds a U.S. stock that pays a dividend, the U.S. government (IRS) often takes a 15% cut before the money even crosses the border. If Canada taxed you on the full amount without a credit, you would be double-taxed.

By entering the amount from Box 39 into your tax return, you are telling the CRA: “I already paid this much to a foreign government.” The CRA then gives you a credit to ensure your total tax paid doesn’t exceed what you would have paid if the money were earned in Canada. This is a crucial step in ensuring your global investments remain efficient.

5. Where is the Money? Reinvestment vs. Payout

If the money isn’t in your bank account, where is it? In 99% of workplace profit-sharing plans, the money is automatically reinvested.

The Compound Interest Engine

When a dividend is allocated to you (Box 24/31), the plan administrator immediately uses that cash to purchase more units of the funds or stocks you own.

• Example: If you own 100 units of a fund and it pays a dividend equal to 2 units, your account statement will suddenly show 102 units.

• You didn’t get “cash,” but you got more “ownership.” Over time, this creates a “snowball effect” where your dividends start earning their own dividends.

How to Direct or Change Your Investments

Most employees don’t realize they have a choice. While you usually cannot stop the allocation (and thus the tax), you can often control the investment:

1. Rebalancing: You can typically log into your plan provider’s portal to move your total balance (including these new dividends) into different funds (e.g., from a “Conservative” fund to an “Aggressive Growth” fund).

2. Cash Payouts: Some rare plans allow you to opt-out of reinvestment and have dividends paid directly to your bank account. However, this is often discouraged by employers as it defeats the purpose of a long-term savings plan.

6. When Will You Physically Receive the Amount?

Since the money is already “yours” (you’ve paid tax on it), you might wonder when you can actually spend it. Access to these funds depends on the Vesting and Withdrawal rules of your specific company plan:

• Upon Leaving the Company: This is the most common trigger. When you resign or retire, the “trust” is dissolved for you. You can either take the cash (which will be sent to your bank account) or transfer it to a personal RRSP or TFSA.

• In-Service Withdrawals: Some plans allow you to withdraw a portion of your vested balance once every year or every two years.

• Hardship Withdrawals: Some plans allow access for major life events, like buying a first home or dealing with a medical emergency.

Important Note: Even though you already paid income tax on the amounts shown on your T4PS, there may be withholding taxes or administrative fees when you finally take the cash out. Always check your plan’s “Summary of Provisions.”

7. Strategic Tax Planning for T4PS Holders

Since a T4PS can result in a surprising tax bill, here are a few tips to manage the impact:

1. Increase Your T4 Withholding: If you know you get a large T4PS every year, ask your HR department to deduct an extra $20 or $50 from your regular bi-weekly paycheck. This prevents a “tax shock” in April.

2. Use RRSP Contributions to Offset: If your T4PS shows you earned an extra $5,000 in “phantom” profit-sharing, consider contributing to your RRSP. The RRSP deduction can cancel out the T4PS income, resulting in a zero-sum tax impact.

3. Track Your Cost Base: Keep your T4PS slips indefinitely. If you ever leave your plan and the provider tries to tax you on the full withdrawal, you can use these slips to prove that you already paid tax on the principal allocations.

Conclusion

The T4PS slip is a marker of your growing wealth, even if it feels like a burden at tax time. By understanding that these “phantom” dividends are being reinvested to buy you more ownership in your plan, you can view the tax payment as a down-payment on a tax-free future withdrawal.

Check your box numbers carefully, claim every dividend and foreign tax credit available, and log into your plan portal to ensure that money is being invested in a way that aligns with your long-term goals.

T4PS Filing Checklist: Getting Every Credit

1. Verify Income Placement

• [ ] Box 35 (Other Employment Income): Ensure this is reported on Line 10400. This is your primary profit-sharing amount.

• [ ] Box 25 & 31 (Taxable Dividends): These must be reported on Line 12000. Note that these are the “grossed-up” amounts (the higher values).

2. Claim Your Tax Reductions (Crucial)

• [ ] Box 26 & 32 (Dividend Tax Credit): Ensure these are applied to Line 40425. These credits are specifically designed to reduce the tax you owe on the “phantom” dividends.

• [ ] Box 39 (Foreign Tax Paid): Use this to complete Form T2209 (Federal Foreign Tax Credits). This ensures you aren’t taxed by both the foreign country and Canada on the same dollar.

• [ ] Box 37 (Foreign Non-Business Income): This is usually already included in Box 35, but it must be broken out on Form T2209 to calculate the credit accurately.

3. Check for “Negative” Income

• [ ] Box 34 (Capital Gains/Losses): If there are brackets around this number, it is a loss. Ensure it is entered as a negative number on Schedule 3 to offset other gains.

• [ ] Box 36 (Total Amount Forfeited): If you left a job and lost some unvested profits that you already paid tax on in previous years, this amount goes on Line 22900 as a deduction to get that tax back.

4. Double-Check “Specified Employee” Status

• [ ] Box 40: Check if “Yes” is ticked. If you own more than 10% of the company shares, you are a “specified employee” and special tax rules (and higher rates) may apply to the amounts in Box 41.

Quick Reference: The “Flow” of Your Money

Pro-Tip for your Plan Provider

If you want to know exactly how your money is working, ask your HR or plan administrator these two questions:

1. “Are my dividends set to DRIP (Dividend Reinvestment Plan) or are they held as cash in the trust?”

2. “What is the Vesting Schedule for my employer’s contributions?” (This tells you when that money officially becomes yours to take if you leave).