CSC Canadian Taxation for Investors 5 — Questions and Answers
Question 1: A Canadian investor holds a bond that was purchased at a discount. How is the discount taxed on a strip bond held in a non-registered account?
- The full gain is treated as a capital gain at 50% inclusion
- The accrued interest (imputed interest) on a strip bond must be reported annually even though no cash is received (Correct answer)
- The discount is only taxed when the bond matures or is sold
- Strip bonds are exempt from Canadian taxation if held to maturity
Correct answer: The accrued interest (imputed interest) on a strip bond must be reported annually even though no cash is received
The CRA requires investors holding strip bonds in non-registered accounts to report the annual accrual of interest income, even though no cash interest is received until maturity.
Question 2: What is the prescribed interest rate used for, in the context of income-splitting strategies in Canada?
- It sets the maximum interest rate on RRSP loans from financial institutions
- It is the minimum rate a higher-income spouse must charge on a loan to a lower-income spouse to avoid attribution rules (Correct answer)
- It determines the withholding rate on foreign investment income
- It is the rate used to calculate RRSP deduction limits
Correct answer: It is the minimum rate a higher-income spouse must charge on a loan to a lower-income spouse to avoid attribution rules
By charging at least the CRA's prescribed rate on interspousal loans, the higher-income spouse avoids attribution rules, allowing the lower-income spouse to pay tax on the investment income at their lower rate.
Question 3: Which of the following situations would create a 'deemed disposition' for Canadian tax purposes?
- Transferring shares from one brokerage to another without selling
- A Canadian resident emigrating from Canada and becoming a non-resident (Correct answer)
- Gifting shares to a registered charity
- Contributing securities in-kind to a TFSA
Correct answer: A Canadian resident emigrating from Canada and becoming a non-resident
When a Canadian resident emigrates and becomes a non-resident, the CRA deems a disposition of most property at fair market value on the date of departure, triggering capital gains.
Question 4: If a taxpayer contributes securities 'in-kind' to their RRSP, what is the tax consequence if the securities have an accrued gain?
- The gain is sheltered inside the RRSP and no tax is owed
- The contribution is deemed to occur at fair market value, triggering a taxable capital gain on the accrued appreciation (Correct answer)
- The contribution is not permitted — only cash is allowed in RRSPs
- The gain is deferred until the securities are sold inside the RRSP
Correct answer: The contribution is deemed to occur at fair market value, triggering a taxable capital gain on the accrued appreciation
Contributing appreciated securities in-kind to an RRSP triggers a deemed disposition at fair market value, so the investor must report the capital gain even though no cash proceeds are received.
Question 5: A Canadian investor receives a T3 slip from a mutual fund trust. Which type of income is least likely to appear on a T3 slip?
- Capital gain distributions
- Foreign income distributions
- Employment income earned through the fund (Correct answer)
- Interest and other income distributions
Correct answer: Employment income earned through the fund
T3 slips report income from trusts (dividends, interest, capital gains, foreign income), never employment income, which is reported on a T4 slip.
Question 6: What is the 'lifetime capital gains exemption' (LCGE) available to Canadian investors?
- An exemption on all capital gains up to $500,000 for any individual investor
- A special exemption on gains from qualifying small business corporation shares and qualified farm or fishing property (Correct answer)
- An annual exemption of $10,000 on capital gains from publicly traded stocks
- A full exemption on capital gains realized inside a TFSA or RRSP
Correct answer: A special exemption on gains from qualifying small business corporation shares and qualified farm or fishing property
The LCGE (over $1 million in 2024) applies specifically to capital gains from qualified small business corporation shares, qualified farm property, and qualified fishing property — not publicly traded securities.
Question 7: An investor sells a rental property for a $100,000 capital gain. Previously claimed capital cost allowance (CCA) of $30,000 was recovered in the sale. How is the $30,000 CCA recapture taxed?
- As a capital gain at the 50% inclusion rate
- As ordinary income at the full marginal rate (Correct answer)
- It is exempt because it was already deducted in prior years
- At the same rate as eligible dividends with a tax credit
Correct answer: As ordinary income at the full marginal rate
CCA recapture is fully included in income as ordinary income in the year of disposition, while only the remaining capital gain qualifies for the 50% inclusion rate.
CSC Canadian Taxation for Investors 5
A Canadian investor holds a bond that was purchased at a discount.
How is the discount taxed on a strip bond held in a non-registered account?