SEGREGATED FUNDS ANNUITIES COMPREHENSIVE
ANSWERS AND QUESTIONS SET A+
✔✔Steven owns his own company "NewCo"
To develop and distribute his product, he needs capital.
What are ways of accessing capital
LLQP - SFA VL 12 - ✔✔- Issue Bonds:
He can issue a fixed income investment like a bondwhich is really just a loan. He can
issue $100,000 worth of 5 year bond with 3% interest.
- issue Commo Shares:
Ownership in company. If he issues common share, he will not be the only owner there
will be other owners. Profits shared with new owners.
✔✔What is Capital
LLQP - SFA VL 12 - ✔✔Capital is really just wealth measured by:
- Physical items such as house, car and precious metal.
- Representational items such as bonds, shares, cash.
✔✔Risk-Reward Relationship
LLQP - SFA VL 12 - ✔✔To earn a higher return, you generally have to accept more risk.
Cash itself is useless it is what you do with it is what matters.
If you have $1,000,000 to invest. If you are so afraid of risks, you might put that
$1,000,000 under your pillow. However, there is no reward and inflation decrease it's
value. On the other hand, if you took that $1,000,000 to start business and it was
successful, it would result in jobs opportunities for others, profits for the shareholders,
and more tax revenue to the go.
,✔✔What are three types of income you receive when you make an investment?
LLQP - SFA VL 13 - ✔✔- interest
- Dividends
- Capital Gains
✔✔What do you think matters to the investors?
How much you earn or how much you get to keep after taxation?
LLQP - SFA VL 13 - ✔✔
✔✔How government encourages you to invest?
LLQP - SFA VL 13 - ✔✔
✔✔Example,
Gerard is a 35% tax bracket. He made 4 investmen outside of an RRSP:
1. $1,000 interest from a bank issued GIC
2. $1,000 Capital Gain (shares bought for $1,000 and sold for $2,000)
3. $1,000 Dividend from a Canadian Issuer
4. $1,000 Dividend from a non-Canadian Issuer
LLQP - SFA VL 13 - ✔✔1. $1,000 Interest
When you earn interest, you're not really investing in
that company or issuer. Therefore, there are no special tax benefits on interest income.
For other investments, the government wants to encourage you to make those
investments so they give you some kind of tax brackets.
Tax payable = Interest earned x Mrginal tax rate (MTR%)
=$1,000 x 35% =$350
2. $1,000 Capital Gain
When you buy shares in a company, you are truly investing in the company. The
government encourages this, so there is a tax break on capital gains.
With capital gains, only HALF of the gain is subject to tax.
Tax payable= Capital gain x 50% x Marginal tax rate (MTR%) = ($2,000 - $1,000) x
50% x 35% = $1,000 x 50% x 35%=$175
3. $1,000 Dividend from a Canadian Company
If a Canadian company has income, it has to pay tax. IF the income is payed out as a
dividend, investors will pay tax on that same money again. The money is being taxed
, twice. It is being taxed when the company has net income, and again when it is paid out
as dividends.
To offset this double taxation, investors receive a Dividend Tax Credit.
4. $1,000 Dividends from a non-Canadian Company
Dividends from a non-Canadian company DO NOT qualify for the Dividend Tax Credit.
The Canadian government does not tax foreign companies, so there is no double-
taxation.
Tax payable = Foreign dividend x Marginal tax rate (MRT%)
=$1,000 x 35%
=$350
✔✔What if you earn dividend from a Canadian company paid in US dollar? Is there a
Divident Tax Credit?
LLQP - SFA VL 13 - ✔✔It is still a dividend from Candian company and it is being taxed
twice so there is a Divident Tax Credit.
✔✔How is Segregated Fund is taxed?
LLQP - SFA VL 13 - ✔✔1. Segregated Fund itself does not pay tax. Instead, any
income earned by the Fund (e.g. interest, dividends, capital gains) is allocated to unit
holders and they are required to report and pay tax on their share of that income.
2. Allocation is made on a flow-through basis. If your Fund earns interest income, you
pay tax on interest income. If your Fund earns dividend or capital gain income, you pay
tax on dividend or capital gain income.
this income is allocated for tax purposes but it is not specifically paid to the unit holders
in cash. It is reported in T3 slips.
Allocation is not actually paid to unit holders in cash. Instead, money is reinvested back
into the Fund and if the investor actually wants to receive the cash, they would have to
redeem certain number of units that would translate into the amount of cash that they
would like to receive.
3. Net capital losses (not just net capital gains) can be allocated to unit holders, which
can be used to offset other capital gains.
4. The adjusted cost base (ACB) is adjusted to reflect the amount of the allocation
because the income stays within the fund. It is as though you are using the allocation to
more of the fund so therefore the cost basis have to be adjusted.
ANSWERS AND QUESTIONS SET A+
✔✔Steven owns his own company "NewCo"
To develop and distribute his product, he needs capital.
What are ways of accessing capital
LLQP - SFA VL 12 - ✔✔- Issue Bonds:
He can issue a fixed income investment like a bondwhich is really just a loan. He can
issue $100,000 worth of 5 year bond with 3% interest.
- issue Commo Shares:
Ownership in company. If he issues common share, he will not be the only owner there
will be other owners. Profits shared with new owners.
✔✔What is Capital
LLQP - SFA VL 12 - ✔✔Capital is really just wealth measured by:
- Physical items such as house, car and precious metal.
- Representational items such as bonds, shares, cash.
✔✔Risk-Reward Relationship
LLQP - SFA VL 12 - ✔✔To earn a higher return, you generally have to accept more risk.
Cash itself is useless it is what you do with it is what matters.
If you have $1,000,000 to invest. If you are so afraid of risks, you might put that
$1,000,000 under your pillow. However, there is no reward and inflation decrease it's
value. On the other hand, if you took that $1,000,000 to start business and it was
successful, it would result in jobs opportunities for others, profits for the shareholders,
and more tax revenue to the go.
,✔✔What are three types of income you receive when you make an investment?
LLQP - SFA VL 13 - ✔✔- interest
- Dividends
- Capital Gains
✔✔What do you think matters to the investors?
How much you earn or how much you get to keep after taxation?
LLQP - SFA VL 13 - ✔✔
✔✔How government encourages you to invest?
LLQP - SFA VL 13 - ✔✔
✔✔Example,
Gerard is a 35% tax bracket. He made 4 investmen outside of an RRSP:
1. $1,000 interest from a bank issued GIC
2. $1,000 Capital Gain (shares bought for $1,000 and sold for $2,000)
3. $1,000 Dividend from a Canadian Issuer
4. $1,000 Dividend from a non-Canadian Issuer
LLQP - SFA VL 13 - ✔✔1. $1,000 Interest
When you earn interest, you're not really investing in
that company or issuer. Therefore, there are no special tax benefits on interest income.
For other investments, the government wants to encourage you to make those
investments so they give you some kind of tax brackets.
Tax payable = Interest earned x Mrginal tax rate (MTR%)
=$1,000 x 35% =$350
2. $1,000 Capital Gain
When you buy shares in a company, you are truly investing in the company. The
government encourages this, so there is a tax break on capital gains.
With capital gains, only HALF of the gain is subject to tax.
Tax payable= Capital gain x 50% x Marginal tax rate (MTR%) = ($2,000 - $1,000) x
50% x 35% = $1,000 x 50% x 35%=$175
3. $1,000 Dividend from a Canadian Company
If a Canadian company has income, it has to pay tax. IF the income is payed out as a
dividend, investors will pay tax on that same money again. The money is being taxed
, twice. It is being taxed when the company has net income, and again when it is paid out
as dividends.
To offset this double taxation, investors receive a Dividend Tax Credit.
4. $1,000 Dividends from a non-Canadian Company
Dividends from a non-Canadian company DO NOT qualify for the Dividend Tax Credit.
The Canadian government does not tax foreign companies, so there is no double-
taxation.
Tax payable = Foreign dividend x Marginal tax rate (MRT%)
=$1,000 x 35%
=$350
✔✔What if you earn dividend from a Canadian company paid in US dollar? Is there a
Divident Tax Credit?
LLQP - SFA VL 13 - ✔✔It is still a dividend from Candian company and it is being taxed
twice so there is a Divident Tax Credit.
✔✔How is Segregated Fund is taxed?
LLQP - SFA VL 13 - ✔✔1. Segregated Fund itself does not pay tax. Instead, any
income earned by the Fund (e.g. interest, dividends, capital gains) is allocated to unit
holders and they are required to report and pay tax on their share of that income.
2. Allocation is made on a flow-through basis. If your Fund earns interest income, you
pay tax on interest income. If your Fund earns dividend or capital gain income, you pay
tax on dividend or capital gain income.
this income is allocated for tax purposes but it is not specifically paid to the unit holders
in cash. It is reported in T3 slips.
Allocation is not actually paid to unit holders in cash. Instead, money is reinvested back
into the Fund and if the investor actually wants to receive the cash, they would have to
redeem certain number of units that would translate into the amount of cash that they
would like to receive.
3. Net capital losses (not just net capital gains) can be allocated to unit holders, which
can be used to offset other capital gains.
4. The adjusted cost base (ACB) is adjusted to reflect the amount of the allocation
because the income stays within the fund. It is as though you are using the allocation to
more of the fund so therefore the cost basis have to be adjusted.
