Chapter 13 Flashcards
What form of income is taxed at a middle rate (compared to other sources)?
Dividend income
Which type of income is taxed at the highest level?
Interest income
What form of income is taxed at the lowest levels?
Capital gains
Wide bid/ask spreads or market illiquidity are examples of hidden ____
Transaction costs
____ are fees, explicited or implicit, which an investor pays to complete an acquisition or disposition of a security.
Transaction costs
This tax strategy involves voluntarily taking losses for the purposes of creating a current tax deduction to offset realized gains.
Tax-Loss Harvesting
The ____ rules state investors cannot buy the same security 30 days before or after the loss trade
Superficial loss
____ 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.
Crystallization
____ measures how much of a pre-tax return an investor keeps after paying tax liabilities on realized or unrealized gains.
Tax efficiency
This is one of the more generous tax-advantaged investments still available.
Labour sponsored Investment fund also known as labor sponsored venture capital Corporation
____ are a version of a ETF that allows the investor to redeem ETF units for the underlying securities.
Holding Company Depository Receipts (HOLDRS)
____ are a type of common equity issued by junior resource companies
Flow-through shares
Indicate how profits from the short sale of stocks are considered for income tax purposes.
Interest income
Profits or losses from the short sale of stocks are considered income because there is no intention of benefit from outright ownership.
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?
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
What’s the formula for Breakeven Inflation Level?
Breakeven Inflation Level = [(rcr)(T - 1)]/[(rcr)(1 – T) – 2T]
What is the formula for Relative Wealth Measure (RWM)?
RWM = [(Return after tax - Return before tax) X 1000] / 1 + Return before tax
- Return must be in decimal form
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
RWM = [(Return after tax - Return before tax) X 1000] / 1 + Return before tax
-8.35, 18.91, -29.94
The ____ is simply the relative proportions of after-tax and pre-tax returns.
Capture Ratio
The ___ measures the amount per $1,000 of assets that needs to be invested at the pre-tax to pay the tax liability.
Relative Wealth Measure
The ___ was developed to determine the percentage of assets lost to tax after distribution.
Morningstar tax-cost ratio
___ 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.
Limited Partnership
