Helping Hand Questions for CIFC

A put option is a contract that gives the buyer the right, but not the obligation, to sell a set number of shares of an underlying asset at a set price within a specified time frame. The buyer of a put option expects the price of the underlying asset to fall below the strike price before the expiration date. Therefore, A is the correct answer. References: Put Option: What It Is, How It Works, and How to Trade Them, Put: What It Is and How It Works in Investing, With Examples, Put Options: Definition, Overview, and Example

 A Fund Facts document is a summary disclosure document that provides key information about a mutual fund, such as its investment objectives, risks, past performance, and fees. One of the information items that a Fund Facts document provides to potential investors is what the mutual fund is currently investing in, such as its top 10 holdings, asset mix, geographic allocation, and sector allocation. A Fund Facts document does not provide information on how to calculate taxes, portfolio management strategy, or remuneration of the Independent Review Committee. References: Fund facts guide | Sun Life Global Investments, Mutual Funds - Fund Facts | ScotiaFunds

A tax trap is a situation where an investor buys a mutual fund just before its ex-dividend date and ends up paying taxes on the distributions that they receive shortly after. This reduces their after-tax return and erodes their capital. To avoid the tax trap, it is advisable to buy the mutual fund after the ex-dividend date, when the fund’s net asset value (NAV) drops by the amount of the distribution. This way, the investor does not receive any taxable income and preserves their capital. Therefore, you should advise Charlie to purchase the Sentinel Canadian Equity Fund after December 20, when the fund goes ex-dividend.

References: Canadian Investment Funds Course, Unit 8, Section 8.2; 4; 5; 6

To calculate Firmansyah’s federal tax liability from the investment income, we need to follow these steps:

• Step 1: Convert the foreign dividend from USD to CAD using the exchange rate given in the question. The exchange rate is 1.3605 CAD per USD, which means that 1 USD is equivalent to 1.3605 CAD. Therefore, Firmansyah’s foreign dividend in CAD is:

500×1.3605=680.25

• Step 2: Calculate Firmansyah’s grossed-up dividend income from both sources. A grossed-up dividend income is the actual dividend received plus a percentage of the dividend that reflects the corporate tax paid by the issuer. The percentage varies depending on whether the dividend is eligible or non-eligible. According to [this site], an eligible dividend is a dividend paid by a Canadian corporation that meets certain criteria, such as being listed on a designated stock exchange or being a subsidiary of such a corporation. A non-eligible dividend is a dividend that does not meet these criteria, such as a dividend paid by a foreign corporation or a small Canadian business corporation. The gross-up rate for eligible dividends in 2020 was 38%, while the gross-up rate for non-eligible dividends in 2020 was 15%. Therefore, Firmansyah’s grossed-up dividend income from both sources is:

(1800+680.25)×(1+0.38)=3426.35

• Step 3: Apply Firmansyah’s federal marginal tax rate to his grossed-up dividend income to get his federal tax before credits. A marginal tax rate is the percentage of tax applied to an additional dollar of income. According to [this site], Firmansyah’s federal marginal tax rate for 2020 was 29%, as his taxable income was between $150,473 and $214,368. Therefore, Firmansyah’s federal tax before credits is:

0.29×3426.35=993.64

• Step 4: Subtract Firmansyah’s federal dividend tax credit from his federal tax before credits to get his net federal tax liability from the investment income. A dividend tax credit is a percentage of the grossed-up dividend income that reflects the corporate tax paid by the issuer and avoids double taxation. The percentage varies depending on whether the dividend is eligible or non-eligible. According to [this site], the federal dividend tax credit rate for eligible dividends in 2020 was 15%, while the federal dividend tax credit rate for non-eligible dividends in 2020 was 9.03%. Therefore, Firmansyah’s federal dividend tax credit from both sources is:

(1800+680.25)×0.38×0.15=297.88

• Step 5: Subtract Firmansyah’s federal dividend tax credit from his federal tax before credits to get his net federal tax liability from the investment income. This is the amount of federal income tax that Firmansyah has to pay or has overpaid from the investment income. Therefore, Firmansyah’s net federal tax liability from the investment income is:

993.64−297.88=695.76

Hence, option C is correct. References: [Canadian Investment Funds Course (CIFC) | IFSE Institute], [Dividend Tax Credit | TurboTax Canada Tips], [Federal Income Tax Rates for Canada - TurboTax Canada Tips], [Eligible Dividends | TurboTax Canada Tips]