Chapter 13

Question 0

What form of income is taxed at a middle rate (compared to other sources)?

Answer 0

Dividend income

Question 1

Which type of income is taxed at the highest level?

Answer 1

Interest income

Question 2

What form of income is taxed at the lowest levels?

Answer 2

Capital gains

Question 3

Wide bid/ask spreads or market illiquidity are examples of hidden ____

Answer 3

Transaction costs

Question 4

____ are fees, explicited or implicit, which an investor pays to complete an acquisition or disposition of a security.

Answer 4

Transaction costs

Question 5

This tax strategy involves voluntarily taking losses for the purposes of creating a current tax deduction to offset realized gains.

Answer 5

Tax-Loss Harvesting

Question 6

The ____ rules state investors cannot buy the same security 30 days before or after the loss trade

Answer 6

Superficial loss

Question 7

____ or managing unrealized gains is similar to tax loss harvesting but takes the process one step further. After the offset trades are executed more of the security in the gain position is purchased.

Answer 7

Crystallization

Question 8

____ measures how much of a pre-tax return an investor keeps after paying tax liabilities on realized or unrealized gains.

Answer 8

Tax efficiency

Question 9

This is one of the more generous tax-advantaged investments still available.

Answer 9

Labour sponsored Investment fund also known as labor sponsored venture capital Corporation

Question 9

____ are a version of a ETF that allows the investor to redeem ETF units for the underlying securities.

Answer 9

Holding Company Depository Receipts (HOLDRS)

Question 10

____ are a type of common equity issued by junior resource companies

Answer 10

Flow-through shares

Question 11

Indicate how profits from the short sale of stocks are considered for income tax purposes.

Answer 11

Interest income

Profits or losses from the short sale of stocks are considered income because there is no intention of benefit from outright ownership.

Question 12

If a real return bond has a real coupon rate of 4% and interest income is taxed at a rate of 30%, what is the breakeven inflation level?

Answer 12

Breakeven inflation level = [(rcr)(T - 1)]/[(rcr)(1 – T) – 2T] = [(0.04)(0.30 – 1)]/[(0.04)(1 – 0.30) – (2)(0.30)] = [(-0.028)/(-0.572)] = 0.04895

Question 13

What’s the formula for Breakeven Inflation Level?

Answer 13

Breakeven Inflation Level = [(rcr)(T - 1)]/[(rcr)(1 – T) – 2T]

Question 14

What is the formula for Relative Wealth Measure (RWM)?

Answer 14

RWM = [(Return after tax - Return before tax) X 1000] / 1 + Return before tax

• Return must be in decimal form

Question 15

Sam is getting really fed-up with all the taxes he pays! He understands he has little control over most, but last year when he saw the tax liability from the returns on his non-registered investment portfolio he was really upset. Sam has asked you to review his portfolio and indicate how efficient the investments are from a tax perspective. Apply the Relative Wealth Measure (RWM) of tax efficiency to the portfolio below. Sam’s marginal tax rate is 43.41%. What is the RWM for each asset?

DEF Preferreds $24,000 yielding 4.0% capital growth
XWY Stock $50,000 yielding 8.0% capital loss
MNO Stock $50,000 yielding 16.0% capital growth

Answer 15

RWM = [(Return after tax - Return before tax) X 1000] / 1 + Return before tax

-8.35, 18.91, -29.94

Question 16

The ____ is simply the relative proportions of after-tax and pre-tax returns.

Answer 16

Capture Ratio

Question 17

The ___ measures the amount per $1,000 of assets that needs to be invested at the pre-tax to pay the tax liability.

Answer 17

Relative Wealth Measure

Question 18

The ___ was developed to determine the percentage of assets lost to tax after distribution.

Answer 18

Morningstar tax-cost ratio

Question 19

___ provide tax deferral, not a permanent tax shelter. The great tax breaks in the early years result in great reductions to the ACB of the asset. The low ACB will ultimately mean a larger taxable capital gain upon disposition.

Answer 19

Limited Partnership