Taxation of Investment Funds and Investor Accounts Flashcards
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Read the first 7 Taxation of Investment Funds and Investor Accounts flashcards as text
How are capital gains distributions received from a mutual fund taxed in the hands of a Canadian investor?
Answer: Only 50% of the capital gain is included in taxable income
Canada's inclusion rate for capital gains is 50%, meaning only half of a capital gain is included in the investor's taxable income.
What does 'adjusted cost base' (ACB) represent for mutual fund investors?
Answer: The average cost of acquiring the fund units, used to calculate capital gains or losses on disposition
The ACB is the average total cost of acquiring fund units, including any reinvested distributions, and is subtracted from the proceeds of sale to determine the capital gain or loss.
Which tax slip is issued by mutual fund trusts to report income distributions, capital gains, and return of capital to unitholders?
Answer: T3
A T3 slip (Statement of Trust Income Allocations and Designations) is issued by mutual fund trusts to report various types of income allocated to unitholders.
How are eligible dividends from Canadian corporations treated differently than interest income for tax purposes?
Answer: Dividends benefit from a dividend tax credit, resulting in a lower effective tax rate
Eligible dividends from Canadian corporations are grossed up and then eligible for the dividend tax credit, which reduces the effective tax rate compared to interest income.
When is a capital gain or loss typically triggered on mutual fund units held in a non-registered account?
Answer: When the units are redeemed, switched to another fund, or otherwise disposed of
A capital gain or loss is realized on a disposition event such as redemption, a fund switch, or transfer, not simply from holding or receiving distributions.
Which type of registered account in Canada allows investment income and growth to accumulate completely tax-free, with no tax on withdrawals?
Answer: Tax-Free Savings Account (TFSA)
The TFSA allows Canadians to earn investment income and make withdrawals completely tax-free, unlike an RRSP where withdrawals are taxed as income.
What is 'return of capital' (ROC) as part of a mutual fund distribution, and how does it affect the investor's ACB?
Answer: It is a tax-free return of the investor's own money that reduces the ACB
Return of capital is not taxable when received but reduces the investor's ACB, which will result in a larger capital gain (or smaller loss) when units are eventually sold.
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