Common & Preferred Shares Flashcards
1
Q
What is Inside information?
A
- Insider Information is confidential and privileged information about a company.
- An insider is an individual who has access to confidential information about a company. This can include more than just an employee or owner.
- From the viewpoint of securities legislation, and insider is:
•An individual who owns, either directly or indirectly, more than 10% of voting shares of the company
•A member of the board of directors, or a senior executive of the company
•A person, like an auditor or consultant, who has a special relationship with the company. - Whether the individual using the information is an insider or not, the use of insider information for personal gain is illegal, even if the individual notifies the proper securities commission of their actions. The insiders of a company are required by law to publish an insider report whenever there are operational charges to the company that are expected to have an effect on the company’s stock price. These reports then become part of the public domain. The general investing public has access to insider trading reports filed with various provincial securities commissions.
- Individual investors can use insider reports as an indicator towards the future trends of a particular stock’s price. By the use of an insider trading indicator, such as the insiders of a company all buying more shares of the company, an investor could potentially earn greater than normal returns on his investments.
2
Q
What is an eligible dividend?
A
- An eligible dividend is a dividend that is eligible for the enhanced dividend tax credit.
- Specifically, an eligible dividend is a dividend that the dividend-paying corporation has given the dividend recipient written notice to that effect.
- The recipient can rely on that notice and need not know anything about the tax status of the corporation.
3
Q
What is the Effective tax rate in Income Tax planning?
A
- Your effective tax rate would be the tax rate that would apply to whatever amt. of income OR deduction that you might be considering!
- The effective tax rate on eligible dividendsThe effective tax rate on eligible dividends is calculated as:•
((1 + grossup rate) x (ETR – (FCRE + PCRE))), where:
•ETR = effective tax rate on ordinary income
•FCRE = Federal conversion rate for the dividend tax credit on eligible dividends; and
•PCRE = provincial conversion rate for the dividend tax credit on eligible dividends.
4
Q
What is an Ineligible Dividend?
A
- An ineligible dividend is a dividend that is not paid from a corporation’s general rate income pool (GRIP) and that is not eligible for the enhanced dividend tax credit.
- An ineligible dividend would usually be paid from retained earnings from active business income that was eligible for the small business deductions (SMABUD) on shares of a taxable Canadian corpn.
5
Q
The Effective tax rate on ineligible dividends is calculated as:
A
(Dividend gross up rate x (ETR - ( federal + provincial conversions rates)))
The after-tax dividend income is the amount calculated as:
(amount of ineligible dividend x (1 - ETR on ineligible dividends).
- For 2014 and subsequent years, the dividend grossup rate for ineligible dividends is 118% and the federal conversion rate for the dividend tax credit on ineligible dividends is 11.0169%
6
Q
What are the different type of preferred shares?
A
- A redeemable preferred share is a preferred share that the issuing company can repurchase from the shareholder within a specified time period.The redemption price is the price at which the corporation can redeem the preferred sharesThe premium is any excess of the redemption value over the par value of the share.The dividend on the investor’s preferred shares is calculated as:•((number of shares x par value) x dividend yield)
- A floating preferred share OR variable rate preferred share is a preferred share that has the dividend payments increase as interest rates increase.
- A convertible preferred is a preferred share that gives the shareholder the right to convert the preferreds into another class of shares within a specified time frame. The other class of shares could be common shares.
- A redeemable preferred is a preferred share that gives the issuer the right to redeem the shares within a specified time period.
- A retractable preferred or a put preferred is a preferred share that gives the shareholder the option to sell her preferred shares back to the issuing company at a specified price and within a specified time.
7
Q
What are preferred shares as compared to common shares?
A
- Unlike common shares, preferreds pay a fixed dividend that does not increase as the company becomes more successful.
- Preferred shares normally do not come with voting rights. To compensate for this lack of voting privileges, preferred shares are paid a fixed dividend.
- Preferred shares have a “preference to assets” over common shares. That is, in the event of liquidation, preferreds are ranked ahead of common shares.
- They also have a “preference as to dividends” over common shareholders. The company must pay any fixed dividends in arrears to its preferred shareholders before any dividends are paid to common shareholders.
8
Q
What is a redeemable preferred share?
A
- A redeemable preferred share is a preferred share that the issuing company can repurchase from the shareholder within a specified time period.
- The redemption price is the price at which the corporation can redeem the preferred shares.
- The premium is any excess of the redemption value over the par value of the share.
- The dividend on the investor’s preferred shares is calculated as:
•((number of shares x par value) x dividend yield)
- A floating preferred share or variable rate preferred share is a preferred share that has the dividend payments increase as interest rates increase.
9
Q
What happens when preferred shares are cumulative?
A
If preferred shares are cumulative, it means that if the corpn. misses a dividend payment, the missed pmt. accumulates as an obligation of the corporation.
- The corpn. cannot pay out any regular dividends to common shareholders until all cumulative preferred dividends have been paid, including those in arrears.
