CIFC Taxation of Investment Funds and Investor Accounts 2

Question 1

What is a 'superficial loss' under Canadian tax rules, and what is its consequence?

Accepted Answer

A capital loss that is denied when the same or identical property is repurchased within 30 days before or after the sale

Answer

A minor capital loss under $200 that is fully deductible

Answer

A loss that occurs when a fund's NAV drops below its issue price

Answer

A loss on foreign currency conversion that is not reportable

Question 2

An investor switches from Fund A to Fund B within the same mutual fund family. What is the tax consequence in a non-registered account?

Accepted Answer

The switch is treated as a disposition of Fund A, potentially triggering a capital gain or loss

Answer

No tax consequence because both funds are in the same family

Answer

The switch defers tax until Fund B is ultimately sold

Answer

The switch generates only a return of capital distribution

Question 3

How does contributing to an RRSP reduce an investor's current-year tax liability?

Accepted Answer

RRSP contributions are deductible from taxable income, reducing the amount of income subject to tax

Answer

RRSP contributions earn a non-refundable tax credit equal to 15% of the contribution

Answer

RRSP contributions are matched by a government grant of 20%

Answer

RRSP contributions are taxed at a flat 10% rate on withdrawal

Question 4

What happens to a capital loss that exceeds capital gains in a given tax year for a Canadian investor?

Accepted Answer

The excess loss can be carried back 3 years or carried forward indefinitely to offset future capital gains

Answer

The excess loss is forfeited and cannot be used

Answer

The excess loss can offset any type of income in the current year

Answer

The excess loss is converted into a non-capital loss

Question 5

Foreign income (interest and dividends) earned inside a non-registered Canadian account is subject to which tax treatment?

Accepted Answer

It is included in Canadian taxable income and may be subject to foreign withholding tax, for which a foreign tax credit may be available

Answer

It is fully exempt from Canadian tax under international treaties

Answer

It is taxed at the preferential capital gains inclusion rate

Answer

It qualifies for the Canadian dividend tax credit

Question 6

What are the tax implications when RESP educational assistance payments (EAPs) are withdrawn and paid to a student beneficiary?

Accepted Answer

EAPs are taxable in the hands of the student beneficiary, who typically has a low income and low tax rate

Answer

EAPs are tax-free to the subscriber who opened the plan

Answer

EAPs are taxed as capital gains at a 50% inclusion rate

Answer

EAPs trigger a full repayment of government grants received

Question 7

Under Canada's attribution rules, what occurs when a higher-income spouse lends or gifts money to a lower-income spouse to invest?

Accepted Answer

All investment income earned on the gifted/loaned funds is attributed back to the higher-income spouse for tax purposes

Answer

The investment income is split 50/50 between spouses regardless of contributions

Answer

The lower-income spouse reports all income with no attribution

Answer

The attribution only applies to capital gains, not income