IFC Tax and Retirement Planning 5 — Questions and Answers
Question 1: A client transfers mutual fund units from a non-registered account into their RRSP. Which tax consequence applies?
- The transfer is tax-free since it is going into a registered account
- The transfer is deemed a disposition at fair market value, triggering any accrued capital gain or loss (Correct answer)
- Only 50% of any gain is reported because mutual funds are equity-based
- No tax applies if the units have been held for more than two years
Correct answer: The transfer is deemed a disposition at fair market value, triggering any accrued capital gain or loss
Contributing securities in-kind to an RRSP triggers a deemed disposition at fair market value, realizing any accrued capital gain (but losses are denied).
Question 2: Which of the following best describes the Lifetime Capital Gains Exemption (LCGE)?
- It exempts all capital gains on publicly traded securities
- It provides an exemption on gains from qualified small business corporation shares and qualified farm/fishing property (Correct answer)
- It allows investors to defer capital gains taxes indefinitely
- It applies to all real estate sold by Canadian residents
Correct answer: It provides an exemption on gains from qualified small business corporation shares and qualified farm/fishing property
The LCGE shelters capital gains on qualified small business corporation shares and qualified farm or fishing property, up to an indexed lifetime limit.
Question 3: What is the purpose of pension adjustment (PA) on a T4 slip?
- It increases RRSP contribution room for employees with employer pensions
- It reduces RRSP contribution room to prevent double-dipping on retirement tax shelters (Correct answer)
- It converts pension contributions into capital gains for tax purposes
- It is a mandatory employee contribution to CPP shown on the T4
Correct answer: It reduces RRSP contribution room to prevent double-dipping on retirement tax shelters
The PA reduces an employee's RRSP contribution room to reflect the tax-assisted pension benefits accruing through an employer pension plan.
Question 4: An investor holds a mutual fund in a non-registered account and receives an annual distribution. Which statement is TRUE?
- All distributions are treated as capital gains
- Distributions retain their character (interest, dividends, capital gains) and are taxed accordingly (Correct answer)
- Distributions are tax-deferred until the fund is sold
- Distributions are always tax-free if reinvested
Correct answer: Distributions retain their character (interest, dividends, capital gains) and are taxed accordingly
Mutual fund distributions flow through to unitholders with their original tax character — interest, Canadian dividends, foreign dividends, or capital gains.
Question 5: Under the Lifelong Learning Plan (LLP), how much can an RRSP holder withdraw annually to fund full-time education?
- $5,000 per year up to a $20,000 lifetime maximum
- $10,000 per year up to a $20,000 lifetime maximum (Correct answer)
- $15,000 per year up to a $30,000 lifetime maximum
- There is no annual limit, only a lifetime cap of $25,000
Correct answer: $10,000 per year up to a $20,000 lifetime maximum
Under the LLP, an individual may withdraw up to $10,000 per year, to a maximum of $20,000 in total, from their RRSP for qualifying full-time education.
Question 6: A retiree wants to minimize OAS clawback. Which strategy is MOST effective?
- Maximizing RRIF withdrawals each year
- Drawing down non-registered investments before registered accounts to manage net income (Correct answer)
- Converting all assets to foreign investments
- Deferring CPP to age 70 to increase the OAS threshold
Correct answer: Drawing down non-registered investments before registered accounts to manage net income
Strategically drawing from non-registered sources (which may include return of capital) before triggering large registered income can keep net income below the OAS clawback threshold.
Question 7: Which of the following correctly describes a group RRSP?
- A government-sponsored plan providing guaranteed retirement income to all employees
- An employer-administered collection of individual RRSPs where employees make contributions, sometimes matched by the employer (Correct answer)
- A plan that locks in contributions until retirement and cannot be withdrawn early
- A plan available only to self-employed individuals with no employees
Correct answer: An employer-administered collection of individual RRSPs where employees make contributions, sometimes matched by the employer
A group RRSP is a collection of individual employee RRSPs administered by the employer, often with employer matching contributions.
IFC Tax and Retirement Planning 5
A client transfers mutual fund units from a non-registered account into their RRSP.
Which tax consequence applies?