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NEW QUESTION # 126
What term refers to surplus cash flow after expenses have been paid?
Answer: A
NEW QUESTION # 127
Sven owns preferred shares that give him the option to sell his holdings back to the issuing company at a predetermined price and within a specified time. What type of preferred shares does Sven own?
Answer: A
Explanation:
A is correct because retractable preferred shares are a type of preferred shares that give the holder the option to sell the shares back to the issuer at a predetermined price and within a specified time. This feature provides the holder with more flexibility and protection against interest rate fluctuations. Participating preferred shares (B) are a type of preferred shares that give the holder the right to receive additional dividends if the issuer's earnings exceed a certain level. Convertible preferred shares are a type of preferred shares that give the holder the option to convert the shares into common shares of the issuer at a predetermined ratio and price.
Redeemable preferred shares (D) are a type of preferred shares that give the issuer the option to buy back the shares from the holder at a predetermined price and within a specified time.
NEW QUESTION # 128
Last year Peter's earned income from employment was $50,000.
Last year, after receiving a $2 per share in dividends from 500 shares in ABC Inc., a publicly-traded Canadian corporation, he sold his shares. The sale resulted in a capital gain of $15,000.
Based on the tax rates mentioned above, what is Peter's net federal tax liability for the year? (Round to 2 decimal places).
Answer: C
Explanation:
To calculate Peter's net federal tax liability for the year, we need to follow these steps:
* Step 1: Calculate Peter's taxable income. This is the amount of income that is subject to federal income tax. It is equal to his earned income from employment plus his net capital gain plus his grossed-up dividend income. A net capital gain is 50% of the capital gain realized from selling an asset. A grossed- up dividend income is the actual dividend received plus a percentage of the dividend that reflects the corporate tax paid by the issuer. According to the image, the dividend gross-up rate is 15.02%.
Therefore, Peter's taxable income is:
50000+0.5×15000+(500×2)×(1+0.1502)=68251.00
* Step 2: Apply the federal tax rates to Peter's taxable income according to the tax brackets shown in the image. The federal tax rates are progressive, meaning that higher income is taxed at higher rates.
Therefore, Peter's federal tax before credits is:
0.15×(48535#0)+0.205×(68251#48535)=11293.69
* Step 3: Subtract the federal tax credits from Peter's federal tax before credits. A tax credit is an amount that reduces the tax payable by a taxpayer. There are two types of federal tax credits: non-refundable and refundable. Non-refundable tax credits can only reduce the tax payable to zero, but not below zero.
Refundable tax credits can reduce the tax payable below zero, resulting in a refund to the taxpayer. In this question, we assume that Peter only has two non-refundable tax credits: the basic personal amount and the dividend tax credit. The basic personal amount is a fixed amount that every taxpayer can claim to reduce their taxable income. According to this site, the basic personal amount for 2021 is $13,808.
The dividend tax credit is a percentage of the grossed-up dividend income that reflects the corporate tax paid by the issuer and avoids double taxation. According to this site, the federal dividend tax credit rate for eligible dividends in 2021 is 15.0198%. Therefore, Peter's federal tax credits are:
0.15×13808+0.150198×(500×2)×0.1502=2100
* Step 4: Subtract Peter's federal tax credits from his federal tax before credits to get his net federal tax liability. This is the amount of federal income tax that Peter has to pay or has overpaid for the year.
Therefore, Peter's net federal tax liability is:
11293.69#2100=9193.69
Hence, option B is correct. References: Federal Income Tax Rates for Canada - TurboTax Canada Tips, Capital Gains Tax in Canada | Wealthsimple, Dividend Tax Credit | TurboTax Canada Tips, Basic Personal Amount (BPA)
NEW QUESTION # 129
What type of fund offers the highest expected risk and the highest expected return in terms of the risk-return trade-off between different types of mutual funds?
Answer: D
Explanation:
Specialty funds, due to their focused and often speculative investments, carry the highest expected risk and return among mutual funds. The feedback from the document states:
"The highest risk, highest expected return mutual fund is a specialty fund." Reference: Chapter 15 - Selecting a Mutual FundLearning Domain: Evaluating and Selecting Mutual Funds
NEW QUESTION # 130
Zofia has held units of the ABC Monthly Income fund for many years and has reinvested all distributions by purchasing additional units. During this period, she received $2,500 in reinvested dividends. She originally purchased $10,000 of fund units, and after several years, the portfolio value rose to $15,000. What is the tax consequence if Zofia decides to sell her units?
Answer: C
Explanation:
When distributions from a mutual fund are reinvested (rather than taken in cash), they are not taxed again at the time of reinvestment. Instead, they increase the adjusted cost base (ACB) of the investment. This is important because when the investor eventually sells the mutual fund units, the capital gain (or loss) is calculated as:
Capital Gain = Proceeds of Disposition - Adjusted Cost Base - Expenses Incurred to Sell In Zofia's case:
* Original investment = $10,000
* Reinvested distributions = $2,500 (which increases the ACB)
* Therefore, ACB = $10,000 + $2,500 = $12,500
* Proceeds of sale = $15,000
* Capital gain = $15,000 - $12,500 = $2,500
Thus, the correct answer is D, because $12,500 is the adjusted cost base and the capital gain on sale would be
$2,500, not $5,000.
This is clearly stated in the Investment Funds in Canada material where it explains that reinvested distributions increase the investor's ACB and are not separately taxed at the time of disposition.
NEW QUESTION # 131
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