CIFC Taxation of Investment Funds and Investor Accounts 3

Question 1

How does the dividend gross-up mechanism work for eligible Canadian dividends?

Accepted Answer

The dividend is increased (grossed up) by 38% for inclusion in income, then a federal dividend tax credit is applied against the tax owing

Answer

The dividend is reduced by 38% before being included in income

Answer

The dividend is exempt from gross-up if it is reinvested through a DRIP

Answer

The gross-up only applies to dividends paid by foreign corporations

Question 2

An investor uses a Dividend Reinvestment Plan (DRIP) to reinvest mutual fund distributions. How does this affect the ACB?

Accepted Answer

The fair market value of reinvested distributions is added to the ACB, increasing it

Answer

DRIP units are received free and have zero ACB

Answer

DRIP reinvestments reduce the ACB by the amount reinvested

Answer

DRIPs have no effect on ACB; it is only adjusted on cash redemptions

Question 3

What is the primary tax advantage of holding interest-bearing investments inside an RRSP compared to a non-registered account?

Accepted Answer

Interest income inside an RRSP grows tax-deferred, with no annual tax on earnings until withdrawal

Answer

Interest earned inside an RRSP is taxed at the capital gains rate

Answer

RRSP interest income qualifies for the dividend tax credit

Answer

Interest inside an RRSP is permanently exempt from tax

Question 4

A mutual fund investor has an ACB of $10,000 for 1,000 units and redeems all units for proceeds of $14,000. What is the taxable capital gain?

Accepted Answer

$2,000

Answer

$4,000

Answer

$14,000

Answer

$7,000

Question 5

How does the TFSA contribution room work if an investor withdraws funds from their TFSA during the year?

Accepted Answer

Withdrawn amounts are added back to contribution room at the beginning of the following calendar year

Answer

Withdrawn amounts permanently reduce lifetime contribution room

Answer

Withdrawn amounts can be recontributed immediately in the same year without limit

Answer

Withdrawals from a TFSA are treated as income and reduce future room

Question 6

What is the tax treatment of management fees paid directly by an investor (as opposed to built into a fund's MER) for investment advice?

Accepted Answer

They are fully deductible as investment expenses for investments held in non-registered accounts

Answer

They are never deductible under any circumstances

Answer

They qualify for a 15% non-refundable tax credit

Answer

They are deductible only for RRSP accounts

Question 7

What is the tax consequence when a deceased investor's RRSP is transferred directly to a surviving spouse who is named as the beneficiary?

Accepted Answer

The RRSP can be rolled over to the surviving spouse's RRSP or RRIF on a tax-deferred basis

Answer

The full RRSP value is immediately included in the deceased's terminal tax return

Answer

The RRSP is converted to a TFSA for the surviving spouse automatically

Answer

The RRSP value is subject to a flat 30% estate tax before transfer