Chapter 24 Canadian Taxation RQ Flashcards
A Canadian resident in the 29% federal tax bracket receives $450 in dividends from a taxable Canadian corporation. Calculate the federal income tax payable on this dividend income.
A. $86.82.
B. $93.27.
C. $130.50.
D. $180.09.
A. $86.82.
Step ONE
Taxable dividend is received amount grossed up dividend by 38%:
$450 × 1.38 = $621
Step TWO
Federal tax payable is 29% on grossed up amount:
29% × $621 = $180.09
Step THREE
Dividend tax credit is 15.02% of grossed up amount:
15.02% × $621 = $93.27
Step FOUR
Basic Federal tax payable is the difference between the tax payable and the tax credit:
$180.09 - $93.27 = $86.82
An investor purchased shares of XYZ Company as follows: 200 in year 1 at $5.50/share, 300 in year 2 at $12.25, and 500 in year 3 at $25.00. She sold 200 shares in year 4 @ $85.25/share. Calculate her adjusted cost base at the time of sale.
A. $5.50.
B. $17.28.
C. $25.00.
D. $45.54.
B. $17.28.
The adjusted cost base of shares generally includes the purchase price plus commission expense. When a taxpayer owns identical shares in a company that were bought at different prices, the method used to calculate the adjusted cost base of such shares is the average cost method. An average cost per share is calculated by adding the total cost of these shares and dividing by the number of shares held. In this example, the adjusted cost base is $17.28 or (($5.50 x 200) + ($12.25 x 300) + ($25.00 x 500)) / 1000.
An investor purchased a bond for $1,095 plus accrued interest of $175 in Year 1. The bond was sold for $1,135 plus accrued interest of $130 in Year 3. Calculate her capital gain or loss from the sale.
A. $40 gain.
B. $40 loss.
C. $5 loss.
D. $85 gain.
A. $40 gain.
The capital gain is calculated as the selling price minus the purchase price which in this example is a $40 gain or ($1,135 - 1,095). The accrued interest paid in Year 1 would reduce the total interest income in Year 1. The accrued interest received would be added to interest income in Year 3. Accrued interest is not included in the capital gain calculation.
A Canadian resident owns an RRSP and has a birthday on February 28. By what date during the year when the taxpayer turns 71 must the RRSP be de-registered?
A. February 28.
B. March 1.
C. April 30.
D. December 31.
D. December 31.
An RRSP holder may de-register the plan at any time, but mandatory de-registration of an RRSP is required during the calendar year when an RRSP plan holder reaches age 71. Therefore, the person would have to de-register the plan by December 31, in the year the holder turned 71.
A taxpayer earned $45,000 from employment, $15,000 net rental income, $500 from Employment Insurance benefits and $2,500 investment income. The taxpayer does not belong to a pension plan and always contributes the maximum allowable each year to a self-directed registered retirement savings plan. Calculate the additional RRSP contribution room the taxpayer will earn from this taxation year.
A. $10,260.
B. $10,800.
C. $11,250.
D. $13,500.
B. $10,800.
Regular Employment Insurance Benefits and investment income are not part of Earned Income for RRSP contribution purposes. Therefore, this taxpayer’s earned income is $60,000 (i.e., $45,000 plus $15,000). In this example, the maximum contribution is 18% of earned income or 0.18 × $60,000 = $10,800.
Calculate the amount of Canada Education Savings Grant (CESG) the federal government will contribute this year to the RESP of a 6-year-old child in a family earning income of $40,000 and contributing $2,500 to the child’s RESP.
A. $200.00.
B. $400.00.
C. $500.00.
D. $600.00.
D. $600.00.
Families earning $40,000 per year that contribute $2,500 per beneficiary in a year will receive a CESG of $600 per beneficiary — 20% on the $2,500 from the basic CESG and an additional 20% on the first $500 invested in the program ($2,500 × 20% + $500 × 20% = $600).
Identify an option for an RRSP holder who de-registers their plan.
A. Transfer to a Spousal RRSP if spouse has contribution room.
B. Transfer funds to a Tax-Free Savings Account (TFSA) on non-taxable basis.
C. Withdraw contributions on non-taxable basis and investment income fully taxed.
D. Transfer the proceeds to a Registered Retirement Income Fund (RRIF).
D. Transfer the proceeds to a Registered Retirement Income Fund (RRIF).
An RRSP plan holder who de-registers a plan has the following options available:
withdraw the proceeds as a lump sum payment, all of which is fully taxable in the year of receipt;
use the proceeds to purchase a life annuity with a guaranteed term;
use the proceeds to purchase a fixed-term annuity which provides an annual income;
allot only a portion of the de-registered plan proceeds to a RRIF and invest the balance of funds in any number of fixed-term or life annuities.
Identify the maximum pension that the current Defined Benefit Plan limits are designed to provide.
A. 9% of the average annual compensation.
B. 2% of pre-retirement earnings per year of service.
C. $1,000 plus 70% of pre-retirement earnings.
D. 18% of the employee’s maximum compensation.
B. 2% of pre-retirement earnings per year of service.
The current DBP limits are designed to provide an employee with a maximum pension of 2% of pre-retirement earnings per year of service. The actual benefits an employee receives depends on the terms of the pension plan.
Select an advantage of a RRIF.
A. Annual income does not fluctuate.
B. Taxable withdrawals can be postponed until age 75.
C. Plan holder cannot run out of investment funds before death.
D. May be self-directed or managed.
D. May be self-directed or managed.
One of the major benefits of a RRIF, as compared to other options available at the de-registration of an RRSP, is flexibility in investments. A RRIF may be self-directed by the holder through instructions to the financial institution holding the plan, or it may be managed. A wide variety of investment vehicles within the Canadian content framework qualify for self-directed plans. They include stocks, bonds, investment certificates, mutual funds, and mortgages.
Robert and Grace are married. Robert has contributed $2,500 to a Spousal RRSP in Grace’s name for the last 6 years and reported the deductions on his tax returns. This year, Grace decided to withdraw $15,000 from her RRSP to help finance a European vacation. What amounts should Robert and Grace report as income on their tax returns this year as a result of Grace’s withdrawal from the spousal RRSP?
A. Robert would report $2,500 and Grace would report $12,500.
B. Robert would report $5,000 and Grace would report $10,000.
C. Grace would report $2,500 and Robert would report $12,500.
D. Grace would report $5,000 and Robert would report $10,000.
B. Robert would report $5,000 and Grace would report $10,000.
Robert would report $5,000: $0 (year 7, the most recent year) + $2,500 (year 6) + $2,500 (year 5). Grace would report $10,000: $2,500 (year 4) + $2,500 (year 3) + $2,500 (year 2) + $2,500 (year 1).
Calculate the contribution room in 2020 to a Tax-Free Savings Account (TFSA) for an investor with $4,000 in unused contribution room who made no withdrawals in the preceding year.
A. $4,000.
B. $10,000.
C. $9,500.
D. $14,000.
B. $10,000.
Your contribution room every year consists of the TFSA dollar limit for that year (the current annual limit is $6,000) plus any withdrawals you made in the preceding year, along with any unused contribution room. In this example, the individual would be able to contribute $6,600+ $4,000 = $10,000.
An investor in a 40% marginal tax bracket earns $2,000 in interest income in year 20XX in her TFSA and makes $400 in withdrawals in the same year. Calculate her tax liability for the year as a result of these transactions.
A. $0.00.
B. $160.
C. $320.
D. $800.
A. $0.00.
While the money contributed to a TFSA is not tax-deductible, there is no tax payable on the income earned in the TFSA – whether it be interest, dividends or capital gains. Withdrawals can be made from a TFSA at any time. There is no limit to how much may be withdrawn and there is no penalty or tax on withdrawals. Thus, in this example, the investor would have zero tax liability as both the interest and the withdrawal are not taxable.
Twelve years after the opening of an RESP, the 22-year-old beneficiary decides not to pursue any type of post-secondary education. If the contributors to the plan have $35,000 and $25,000, respectively in contribution room in their individual RRSPs, how much of an $85,000 investment income balance may be transferred tax-free to the RRSPs?
A. $0.00.
B. $35,000.
C. $50,000.
D. $85,000.
C. $50,000. The contributor(s) to an RESP can withdraw the income from an RESP provided that the plan has been in existence more than 10 years and that none of the named beneficiaries has started qualified post-secondary programs by age 21 or all of the named beneficiaries have died. Further, contributors can transfer a maximum of $50,000 of this income to their RRSPs if the beneficiaries do not attend qualifying programs. This is dependent on there being sufficient contribution room remaining in the RRSP. In this example, the contributors can transfer a total of $50,000. The balance of the income would be subject to tax on withdrawal.
Calculate the maximum amount an employee who earns $80,000 in 20XX may make as a tax-deductible contribution for current service to his Defined Benefit Pension Plan for the year if his Pension Adjustment (PA) is $3,600.
A. $0.00.
B. $3,520.
C. $3,600.
D. $7,200.
B. $3,520.
Generally, employee current service contributions are restricted to the lesser of:
9% of the employee’s compensation for the year; and
$1,000 plus 70% of the employee’s PA for the year.
In this example, $1,000 + 70% × $3,600= $3,520, would be less than 9% of $80,000 = $7,200 and therefore $3,520 would be the maximum allowable current service contribution.
An investor acquires 200 rights of ABC Inc. in a rights distribution, giving him the right to acquire 200 shares at $20. He later sells all 200 on the open market for $1.50 per right as ABC was trading for $21.25. Calculate his capital gain per right.
A. $0.00.
B. $0.25.
C. $1.50.
D. $1.75.
C. $1.50.
The trading price of ABC and the details of the price at which an individual may acquire ABC rights are irrelevant to the calculation of the capital gain or loss. Rights received as part of a distribution are considered to have a zero-cost base, meaning that the investor would have $1.50 in capital gains ($1.50 sale price - $0.00 cost base).
