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investor clinic

Thanks to everyone who took Investor Clinic’s annual quiz last week. If you missed it, you can still take it here. online (

As promised, today I’ll explain some of the questions that left readers scratching their heads. Let’s start with question No. 1:

  • Santa Claus is planning to sell his marijuana stocks and claim a tax loss. The last day he can sell his shares so he can claim a loss for 2019 is:

A. Dec. 26

B. Dec. 27

C. Dec. 30

D. Dec. 31

The key thing to know is that stock trades settle – that is, the shares and money actually change hands – two business days after the trade date. Because Dec. 28 and 29 fall on a weekend, a sale that is entered on Dec. 27 will settle on Dec. 31 – the last day of the year. So the correct answer is B.

Question No. 9 stumped a lot of readers:

  • North Pole Candy Cane Co. trades at $87 a share and pays a quarterly dividend of $1. If the stock has a price-to-earnings (P/E) multiple of 21, the company’s dividend payout ratio is about:

A. 97 per cent

B. 68 per cent

C. 4.6 per cent

D. Not known

Some investors said the payout ratio – which measures the percentage of earnings paid out as dividends – can’t be determined based on the information provided. But it can. The first step is to calculate the company’s earnings. If the stock trades at $87 a share and the price-to-earnings multiple is 21, that means the company’s earnings multiplied by 21 should equal $87. To figure out the earnings, divide $87 by 21, which gives $4.14 a share. The next step is to calculate the company’s annual dividend, which is $1 times four, or $4 a share. The final step is to calculate the payout ratio, which is the annual dividend of $4 divided by $4.14 a share in earnings, or about 97 per cent. So the correct answer is A.

Question No. 10 also tripped up a few readers:

  • In a non-registered account, Steve buys 300 shares of XYZ Corp. at $55 each. A month later, he sells 200 shares at $80. Finally, he transfers the remaining 100 shares to his tax-free savings account when the share price is $90. The transfer results in a capital gain of:

A. Zero

B. $500

C. $1,200

D. $3,500

To get the correct answer, you need to track the adjusted cost base (ACB) per share of Steve’s shares. Since he bought 300 shares at $55 each, his ACB per share is $55 (we’re ignoring commissions to make things easier). When Steve sells 200 shares at $80, he would record a capital gain of $25 a share ($80 minus $55), or $5,000 in total. But here’s the key thing: The ACB of the remaining 100 shares doesn’t change. It’s still $55 a share – the initial price he paid. When he transfers those 100 shares to his TFSA, the Canada Revenue Agency considers it a “deemed disposition” with the same tax consequences as if Steve had sold the shares at the prevailing market price. So he would record a capital gain that equals the sale proceeds of $9,000 ($90 times 100) minus the initial cost of $5,500 ($55 times 100), which works out to answer D. $3,500.

Next up, question No. 13:

  • If you’d purchased $10,000 of Royal Bank shares 20 years ago and reinvested all of your dividends, as of Dec. 16 your stake (ignoring taxes) would be worth about:

A. $42,100

B. $83,300

C. $136,200

D. $2.1-million

Contrary to what a few readers thought, I wasn’t expecting people to gather 20 years’ worth of Royal Bank share price and dividend data and calculate the answer manually. That would have taken up the entire holidays. A quicker method is to use an online total return calculator such as the one at If you enter a starting date of Dec. 16, 1999, and an ending date of Dec. 16, 2019, the calculator shows that an initial investment of $10,000, with dividends reinvested, would grow to $136,238.76 – which rounds down to answer C. This, by the way, works out to an annualized return of nearly 14 per cent. The point of this question was to illustrate that a simple buy-and-hold strategy can generate exceptionally strong returns thanks to the combination of share price gains, dividend reinvestment and dividend growth.

Finally, we’ll look at question No. 15:

  • Which statement is false?

A. Old Age Security benefits are taxable.

B. Minimum RRIF withdrawals are not taxable.

C. Return of capital reduces the investor’s cost base.

D. Reinvested distributions increase the cost base.

Note that the question asked which statement is false. Answers A, C and D are all true. That leaves B. When you make the minimum required registered retirement income fund withdrawal, the amount is not subject to withholding tax. However, the withdrawal is still subject to income tax when you file your return. So answer B is false and is therefore the correct answer.

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