CSC Canadian Taxation for Investors 4 — Questions and Answers
Question 1: An investor has $8,000 in net capital losses in the current year and no capital gains. What can they do with these losses under Canadian tax rules?
- Deduct the full $8,000 against any type of income
- Carry the losses back up to 3 years or forward indefinitely to offset future capital gains (Correct answer)
- The losses are permanently lost if not used in the current year
- Carry the losses forward for a maximum of 7 years only
Correct answer: Carry the losses back up to 3 years or forward indefinitely to offset future capital gains
Net capital losses can be carried back 3 years or carried forward indefinitely, but they can only be applied against capital gains, not other income.
Question 2: What is the key difference between a 'deferred' tax plan (RRSP) and an 'exempt' tax plan (TFSA) for Canadian investors?
- RRSP withdrawals are tax-free; TFSA withdrawals are taxable
- RRSP provides a deduction now but taxes withdrawals later; TFSA offers no deduction but withdrawals are tax-free (Correct answer)
- Both plans tax withdrawals at the same rate as interest income
- TFSA contributions are deducted from income; RRSP contributions are not
Correct answer: RRSP provides a deduction now but taxes withdrawals later; TFSA offers no deduction but withdrawals are tax-free
An RRSP defers tax — you get a deduction now and pay tax on withdrawal — while a TFSA is an exempt plan where contributions are after-tax but growth and withdrawals are tax-free.
Question 3: A Canadian investor sells shares of a publicly traded corporation at a loss. At what deadline must the trade settle to claim the loss in the current tax year?
- The sale must occur before December 31
- The trade must settle on or before December 31 of the tax year
- The sale must occur before December 25 to ensure settlement before year-end (Correct answer)
- The trade date alone determines the tax year, regardless of settlement
Correct answer: The sale must occur before December 25 to ensure settlement before year-end
Canadian securities settle T+1 (or T+2 for some), so a trade on approximately December 28–30 would not settle until after December 31; investors must sell early enough for settlement to occur by year-end.
Question 4: What is the federal dividend tax credit designed to compensate for?
- The foreign withholding tax paid on US dividends
- The corporate income tax already paid on profits before they were distributed as dividends (Correct answer)
- The annual inflation reduction in dividend purchasing power
- The transaction costs of reinvesting dividends automatically
Correct answer: The corporate income tax already paid on profits before they were distributed as dividends
The dividend tax credit is intended to reduce double taxation by giving individual shareholders credit for the corporate tax the company already paid on the earnings distributed as dividends.
Question 5: Which of the following investments held inside an RRSP generates the most immediate tax advantage compared to holding it in a non-registered account?
- Canadian equities that pay eligible dividends
- Government of Canada bonds paying annual interest (Correct answer)
- A diversified equity ETF with minimal distributions
- TFSA-eligible savings deposits
Correct answer: Government of Canada bonds paying annual interest
Interest income is taxed at the full marginal rate in a non-registered account, so sheltering highly taxed interest inside an RRSP produces the greatest tax deferral advantage.
Question 6: How are capital gains realized inside a Tax-Free Savings Account (TFSA) treated for tax purposes?
- They are taxed at the 50% inclusion rate when withdrawn
- They are completely tax-free — no tax is owed when earned or withdrawn (Correct answer)
- They reduce future TFSA contribution room by the amount of the gain
- They are treated as ordinary income inside the account
Correct answer: They are completely tax-free — no tax is owed when earned or withdrawn
All income, including capital gains, earned inside a TFSA is completely exempt from tax both while inside the account and when withdrawn.
Question 7: Under the Canadian tax system, which type of investment income receives the LEAST favorable tax treatment for individuals?
- Eligible dividends from Canadian corporations
- Capital gains from selling appreciated shares
- Interest income from bonds and GICs (Correct answer)
- Return of capital distributions from REITs
Correct answer: Interest income from bonds and GICs
Interest income is included in taxable income at 100% and taxed at the full marginal rate, making it the least tax-efficient form of investment income compared to dividends or capital gains.
CSC Canadian Taxation for Investors 4
An investor has $8,000 in net capital losses in the current year and no capital gains.
What can they do with these losses under Canadian tax rules?