CSI Investment Funds in Canada IFC Exam Questions

Answer : B

The bond fund should be contributed to Natasha's RRSP from a tax efficiency perspective, because interest income from bonds is fully taxable at her marginal tax rate outside of an RRSP. By contributing the bond fund to her RRSP, Natasha can defer paying tax on the interest income until she withdraws it from her RRSP in retirement, when she may be in a lower tax bracket. The equity fund should be kept outside of her RRSP, because dividends and capital gains from equities receive preferential tax treatment compared to interest income. Dividends qualify for the dividend tax credit and capital gains are only 50% taxable. Furthermore, equities tend to have higher returns than bonds over the long term, which means that Natasha would have more after-tax income by keeping them outside of her RRSP. Reference:Registered Retirement Savings Plan (RRSP),Does it pay to invest in an RRSP? Here's the math

Answer : C

Answer : A

The answer that you should tell Harry is that he should hold profitable investments as long as possible. A capital gain is the difference between the selling price and the purchase price of an asset when the selling price is higher than the purchase price. A capital gain is subject to tax only when it is realized, meaning that the asset is sold or disposed of. Therefore, one way to defer paying tax on capital gains is to hold profitable investments as long as possible and delay selling them until a future year. This allows the investor to postpone paying tax on the capital gain and benefit from the compounding effect of the investment returns. Therefore, option A is correct regarding how to defer paying taxes on capital gains. The other options are not correct or effective ways to defer paying taxes on capital gains. Option B is false because investing in mutual funds just before the dividend paying date does not defer paying taxes on capital gains; rather, it increases the taxable income of the investor by adding dividend income, which may be subject to a gross-up and a tax credit depending on the type of dividend. Option C is false because buying and selling investments actively does not defer paying taxes on capital gains; rather, it triggers more taxable events and increases the transaction costs of investing. Option D is false because holding unprofitable investments as long as possible does not defer paying taxes on capital gains; rather, it reduces the potential return of the portfolio and prevents the investor from using capital losses to offset capital gains from other sources. Reference: [Capital Gains Tax in Canada | Wealthsimple], [Capital Gains Tax: What It Is and How It Works in Canada], [Capital Gains Tax | GetSmarterAboutMoney.ca]

Answer : C

Eligible Canadian dividends are grossed up by 38% and then receive a federal dividend tax credit of 15.02% of the taxable amount.

For Nancy's $160 dividend:

Grossed-up amount = $160 1.38 = $220.80

Federal dividend tax credit = 15.02% $220.80 = $33.15

Thus, Nancy will receive a dividend tax credit of approximately $33.

Answer : C

Back-end load funds often have a decreasing redemption fee (deferred sales charge) schedule, which reduces the longer the investor holds the fund. The feedback from the document states:

'Fund sponsors use a decreasing redemption fee (deferred sales charges) schedule to recover their costs from investors who opt out of the fund early. In most cases, redemption fees on a back-end load fund decrease the longer the investor holds the fund.'

Answer : C

Scarcity is a characteristic of investment capital that refers to the limited availability of capital relative to the demand for it. Scarcity affects the price and return of capital, as well as the allocation of capital among different issuers and sectors. When capital is scarce, issuers have to compete for it by offering higher returns or lower prices, or by adjusting their financing strategies. When capital is abundant, issuers have more access to it at lower costs or higher prices, or by diversifying their sources of capital. In this case, Raybert has a very short-term investment objective and has decided to purchase money market instruments. There are plenty of 90-day money market securities available for him to choose from, but he can only afford to purchase one. This means that the issuers of these securities are exposed to the scarcity of capital, as they have to attract Raybert and other investors with similar objectives by offering competitive rates or discounts.

Reference = Canadian Investment Funds Course, Unit 5: Types of Investments, Lesson 1: Economic Factors and Financial Markets, Section 5.1.1: Characteristics of Investment Capital1; CIFC prepkit, Chapter 5: Types of Investments, Question 5.1.1 2

Answer : B

New taxes on foreign direct investment increase the cost of investing in a country, making it less attractive for foreign capital and likely causing capital outflows. The feedback from the document explains:

'Capital moves in and out of a country based on a variety of risk factors. Increased trade barriers or increased taxes on foreign investments would typically reduce the attractiveness of a country for foreign investment. (a), (c), and (d) would all indicate positive trends in a risk factor analysis.'