Welcome to the second and final instalment of the Investor Clinic post-quiz review. Today, in response to your e-mail queries, I'll be explaining another batch of questions that left some readers scratching their heads.
You can find Part 1 of the post-quiz review here.
And if you are among the small minority of Canadians who haven't yet taken the quiz, there's still time. You can find the quiz here.
Question No. 10 stumped a few readers:
Which of the following statements is false?
a) You must convert your RRSP to a RRIF in the year that you turn 71
b) RRSP contributions do not have to be claimed in the year they are made
c) In some cases RRIF income can be split with a spouse
d) The minimum percentage of RRIF assets that must be withdrawn annually rises with age
This was a bit of a trick question. If you are planning to convert your RRSP to an RRIF, then it's true that you must do so by the end of the year that you turn 71. However, you have other options at that time; you could withdraw the funds from your RRSP (usually not a good idea because of the tax consequences) or use your RRSP funds to purchase an annuity. Answer a) is therefore false. The other statements are all true.
Several readers were also puzzled by question No. 12:
If you bought 200 shares of ABC Corp. for $30 each, sold 100 shares of ABC for $33 each and then bought 150 shares of ABC for $35 each, the adjusted cost base (ACB) of your 250 shares would be:
Some readers incorrectly chose b) $31.80. They reasoned that the investor made a net investment of $7,950 ($6,000 minus $3,300 plus $5,250) which, based on the 250 shares owned, produces an ACB of $31.80 per share ($7,950 divided by 250). But this is the wrong way to calculate the ACB. When you sell part of your existing holdings, your ACB per share does not change. In the example, the initial ACB per share was $30, and it remains $30 after the 100 shares are sold for $33 each. The remaining 100 shares therefore have a total ACB of $3,000 ($30 times 100) which, when added to the $5,250 cost of the additional 150 shares purchased, produces an ACB of $8,250. Divide that number by 250 shares to get the correct answer – c) $33.
Next up, question No. 14:
For 2015, the Old Age Security clawback kicks in at income of $72,809. If your income is $100,000, you would have to repay ______ of your OAS.
The key thing to know is that, for every dollar that your income exceeds the threshold of $72,809 (for the 2015 tax year), you must pay back 15 cents (or 15 per cent) of your OAS pension. So, if you earn $100,000, you would have to pay back 15 per cent of $27,191 ($100,000 minus $72,809), which is b) $4,078.65.
Finally, we'll look at question No. 15:
Which of the following statements is true?
a) Dividends are always taxed at a lower rate than capital gains
b) Capital gains are always taxed at a lower rate than dividends
c) "In-kind" RRIF withdrawals are tax-free
d) The tax rate on dividends can be negative
Some readers chose a) or b), but both are false. Generally, at lower income levels dividends have a tax advantage over capital gains, whereas at higher income levels capital gains are often taxed at a lower rate than dividends. It's also false that in-kind RRIF withdrawals are tax free; these amounts are added to your taxable income. The only true statement is d) The tax rate on dividends can be negative. This is because, at low income levels in many provinces, the combined federal and provincial dividend tax credits can exceed one's marginal tax rate. Confused? You can read a more thorough explanation here.