Question # 1
| Which statement about a net capital loss incurred by a mutual fund trust is CORRECT? | | A. A net capital loss is passed on to the unit holders by the mutual fund in the year it
occurs.
| | B. A net capital loss is permitted to be carried forward by the mutual fund for up to 3 years.
| | C. A net capital loss is permitted to be carried forward indefinitely by the mutual fund.
| | D. A net capital loss is permitted to be carried back indefinitely by the mutual fund. |
C. A net capital loss is permitted to be carried forward indefinitely by the mutual fund.
Explanation: A net capital loss is the excess of allowable capital losses over taxable
capital gains in a taxation year. A mutual fund trust is a type of investment fund that is
structured as a trust and distributes its income and capital gains to its unit holders. A
mutual fund trust cannot pass on its net capital losses to its unit holders, as it can only
distribute its net income and net realized capital gains. However, a mutual fund trust can
carry forward its net capital losses indefinitely and use them to offset its taxable capital
gains in future years. This reduces the amount of tax payable by the mutual fund trust and
increases the amount of distributions available to its unit holders. A mutual fund trust
cannot carry back its net capital losses to previous years, as this option is only available to
corporations.
Question # 2
| Which of the following is a characteristic of a bond fund? | | A. Income from a bond fund will primarily be interest but may also be capital gains
| | B. Bond funds are very low risk because they never go down in value.
| | C. If interest rates rise the value of a bond fund will also tend to rise.
| | D. Securities regulation specifies that bond funds must invest in investment grade bonds. |
A. Income from a bond fund will primarily be interest but may also be capital gains
Explanation: A bond fund is a mutual fund that invests primarily in bonds and other debt
securities. Income from a bond fund will primarily be interest but may also be capital gains
if the fund sells bonds that have appreciated in value. Bond funds are not very low risk
because they can fluctuate in value depending on interest rate changes and credit risk. If
interest rates rise, the value of a bond fund will tend to fall because existing bonds will
become less attractive than new bonds with higher rates. Securities regulation does not
specify that bond funds must invest in investment grade bonds, although some funds may
have this as an investment objective or policy.
Question # 3
| Megan purchases a treasury bill for $98,200. When it matures for $100,000, how does
Megan treat the $1,800 difference? | | A. as interest income
| | B. as a capital gain
| | C. as a dividend
| | D. as return of capital |
A. as interest income
Explanation: A treasury bill is a short-term debt instrument issued by the government at a
discount from its face value and redeemed at par value at maturity. The difference between
the purchase price and the face value is the interest income earned by the investor.
Therefore, Megan treats the $1,800 difference as interest income for tax purposes. Interest
income is fully taxable at the investor’s marginal tax rate in the year it is received. Megan
does not report any capital gain, dividend, or return of capital from the treasury bill.
Question # 4
| Leira has a marginal tax rate of 45% and may deduct $5,000 in registered retirement
savings plan (RRSP) contributions on her income tax return. If she decides to use her
available deduction and assuming
this does not reduce her taxable income to a lower tax bracket, by how much will it reduce
her tax payable? | | A. $5,000
| | B. $4,500
| | C. $2,250
| | D. $0 |
C. $2,250
Explanation: A registered retirement savings plan (RRSP) is a type of tax-deferred
account that allows individuals to save for retirement. Contributions to an RRSP are
deductible from taxable income, which means that they reduce the amount of income tax
payable for the year. The amount of tax savings from an RRSP contribution depends on
the individual’s marginal tax rate, which is the tax rate applied to the next dollar earned.
Leira has a marginal tax rate of 45% and may deduct $5,000 in RRSP contributions on her
income tax return. If she decides to use her available deduction and assuming this does
not reduce her taxable income to a lower tax bracket, by how much will it reduce her tax
payable? To answer this question, we can use the following formula: $$(Tax savings =
RRSP contribution \times Marginal tax rate)
Question # 5
| For what reason do different entities have securities created and sold? | | A. Government debt is reduced due to the capital that is received from investors when their
securities are purchased | | B. When common shares are initially sold, the capital raised will increase the issuing
corporation's retained earnings. | | C. Governments can address financial needs and support initiatives when securities are
first sold. | | D. The issuance of securities is a method used by corporations to redistribute their wealth
to investors to lower taxes. |
C. Governments can address financial needs and support initiatives when securities are
first sold.
Explanation:
One of the main reasons why different entities have securities created and sold is to raise
funds for various purposes. Governments, for example, can issue securities such as bonds
or treasury bills to finance public spending, such as infrastructure, education, health care,
or social programs. By selling securities to investors, governments can borrow money at a
lower cost than other sources of funding, and can also stimulate the economy and create
jobs.
Question # 6
| Sven owns preferred shares that give him the option to sell his holdings back to the issuing
company at a predetermined price and within a specified time. What type of preferred
shares does Sven own? | | A. retractable | | B. participating | | C. convertible | | D. redeemable |
A. retractable
Explanation: A is correct because retractable preferred shares are a type of preferred
shares that give the holder the option to sell the shares back to the issuer at a
predetermined price and within a specified time. This feature provides the holder with more
flexibility and protection against interest rate fluctuations. Participating preferred shares (B)
are a type of preferred shares that give the holder the right to receive additional dividends if
the issuer’s earnings exceed a certain level. Convertible preferred shares © are a type of
preferred shares that give the holder the option to convert the shares into common shares
of the issuer at a predetermined ratio and price. Redeemable preferred shares (D) are a
type of preferred shares that give the issuer the option to buy back the shares from the
holder at a predetermined price and within a specified time.
Question # 7
| Taylor is chatting with other parents in the park when the conversation turns to registered
education savings plans (RESPs). Taylor thinks that most of what they are saying is
incorrect. Which of the following
statements about self-directed RESPs is TRUE? | | A. The government contributes an additional grant for low income families who qualify.
| | B. Only one beneficiary may be named per RESP.
| | C. Educational Assistance Payments (EAPs) may only be used for tuition for a postsecondary
program.
| | D. Educational Assistance Payments (EAPs) withdrawn from the plan are not taxable. |
A. The government contributes an additional grant for low income families who qualify.
Explanation: A self-directed RESP is a type of RESP where the subscriber (the person
who opens the plan) has the freedom to choose and manage the investments within the
plan, such as stocks, bonds, mutual funds, etc. A self-directed RESP can have one or more
beneficiaries (the children who will use the funds for their education) and can be individual
or family plans. A self-directed RESP is eligible for the Canada Education Savings Grant
(CESG), which is a 20% matching grant on the first $2,500 of annual contributions per
beneficiary, up to a lifetime limit of $7,200. Additionally, low income families who qualify
may receive an extra 10% or 20% on the first $500 of annual contributions per beneficiary,
depending on their net family income. This is called the Additional CESG. Educational
Assistance Payments (EAPs) are the payments made from the RESP to the beneficiary
when they enroll in a qualifying post-secondary program. EAPs consist of the CESG, the
Additional CESG, and any income or growth earned within the plan. EAPs may be used for
any education-related expenses, such as tuition, books, transportation, accommodation,
etc. EAPs are taxable in the hands of the beneficiary, who usually has a lower tax rate than
the subscriber.
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