CSC Canadian Taxation for Investors 2 — Questions and Answers
Question 1: Which of the following describes the tax treatment of Canadian eligible dividends received by an individual investor?
- They are taxed at the same rate as interest income
- They are grossed up and eligible for the enhanced dividend tax credit (Correct answer)
- They are fully tax-exempt up to $5,000 annually
- They are taxed as capital gains at 50% inclusion
Correct answer: They are grossed up and eligible for the enhanced dividend tax credit
Eligible dividends from Canadian corporations are grossed up by 38% and qualify for the enhanced federal dividend tax credit, reducing the effective tax rate.
Question 2: An investor sells shares for a capital gain of $20,000. What is the taxable capital gain included in income under current Canadian tax rules?
- $20,000
- $10,000 (Correct answer)
- $15,000
- $13,333
Correct answer: $10,000
Canada's capital gains inclusion rate is 50%, so only half ($10,000) of the $20,000 capital gain is included in taxable income.
Question 3: What is the primary tax advantage of contributing to a Registered Retirement Savings Plan (RRSP)?
- Investment growth is tax-free forever
- Contributions are deducted from taxable income and growth is tax-deferred (Correct answer)
- Withdrawals are completely tax-free at any age
- Dividends inside the RRSP generate a dividend tax credit
Correct answer: Contributions are deducted from taxable income and growth is tax-deferred
RRSP contributions reduce current taxable income and all investment growth is tax-deferred until withdrawal, when amounts are taxed as ordinary income.
Question 4: A Canadian investor holds US stocks in a non-registered account. How is US withholding tax on dividends typically treated for Canadian tax purposes?
- It is ignored and not reportable in Canada
- It qualifies as a foreign tax credit to reduce Canadian tax owing (Correct answer)
- It is added to the adjusted cost base of the shares
- It is deducted as a business expense only for professionals
Correct answer: It qualifies as a foreign tax credit to reduce Canadian tax owing
US withholding tax paid on foreign dividends can be claimed as a foreign tax credit on the Canadian tax return, reducing double taxation.
Question 5: Which type of account shelters investment income from tax as it is earned, but taxes withdrawals as ordinary income?
- Tax-Free Savings Account (TFSA)
- Non-registered account
- Registered Retirement Savings Plan (RRSP) (Correct answer)
- Registered Education Savings Plan (RESP)
Correct answer: Registered Retirement Savings Plan (RRSP)
The RRSP shelters growth from annual taxation (tax-deferred), but all withdrawals — including principal and growth — are taxed as ordinary income in the year received.
Question 6: When a mutual fund distributes realized capital gains to unitholders at year-end, what is the tax consequence for a unitholder in a non-registered account?
- The distribution is tax-free because the fund already paid tax
- The unitholder must report the capital gain distribution as taxable income (Correct answer)
- The distribution is treated as a return of capital with no tax impact
- The unitholder can defer the tax until they sell their units
Correct answer: The unitholder must report the capital gain distribution as taxable income
Capital gain distributions from mutual funds flow through to unitholders and must be reported on their personal returns, even if units are not sold.
Question 7: What is the 'superficial loss' rule in Canadian tax law?
- A rule that limits capital losses on penny stocks
- A rule that denies a capital loss when the same or identical property is repurchased within 30 days before or after the sale (Correct answer)
- A rule requiring losses to be offset against gains in the same tax year
- A rule that prevents capital loss carryforwards beyond 10 years
Correct answer: A rule that denies a capital loss when the same or identical property is repurchased within 30 days before or after the sale
The superficial loss rule denies a claimed capital loss if the taxpayer (or an affiliated person) reacquires the same or identical property within 30 days of the sale.
CSC Canadian Taxation for Investors 2
Which of the following describes the tax treatment of Canadian eligible dividends received by an individual investor?