Free Practice Questions for CSI IFC Exam

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."

Interest income distribution is a type of income that a mutual fund pays to its investors from the interest earned on its fixed-income investments, such as bonds and mortgages. Interest income distribution is taxed as ordinary income at the investor’s top marginal tax rate, which is the highest tax rate that applies to their income bracket. Therefore, B is the correct answer. References: Interest Income and Taxes - Fidelity, Topic No. 403, Interest Received | Internal Revenue Service

The category of Know Your Client (KYC) information that has been given is investment experience. Investment experience refers to the level of knowledge and familiarity that a client has with various types of investments, such as mutual funds, stocks, bonds, etc. It also includes the client’s past performance, frequency of trading, and length of holding period. In this case, Felipe has given information about his investment experience by stating that he purchased a mutual fund with a deferred sales charge, that he had a 25-year growth objective, that he never noticed his mutual fund having a drop in value, and that he never made any changes to his investment.

References = Know Your Client (KYC): What It Means, Compliance Requirements, Know Your Client (KYC) - Overview, Importance and Benefits, Process, IFSE CIFC Module 2: The Investment Industry, page 2-14.

The expected portfolio return is the weighted average of each fund’s return.

Investment in ABC Bank Canadian Equity = $350 ÷ $500 = 70%

Investment in ZYX Global Growth Fund = $150 ÷ $500 = 30%

Expected Return = (0.70 × 8%) + (0.30 × 9.8%)

= 5.6% + 2.94% = 8.54% ≈ 8.5%

Correct answer = 8.5%.

The federal tax on eligible Canadian dividends is calculated as follows:

First, the dividend amount is grossed up by 38%, which means multiplying it by 1.38. This is to account for the corporate tax that has already been paid by the company. Eleanora’s grossed-up dividend is $500 x 1.38 = $690.

Second, the grossed-up dividend is multiplied by the federal marginal tax rate to get the gross federal tax. Eleanora’s gross federal tax is $690 x 0.29 = $200.10.

Third, the grossed-up dividend is multiplied by the federal dividend tax credit rate to get the federal tax credit. This is to avoid double taxation of the dividend income. Eleanora’s federal tax credit is $690 x 0.1502 = $103.64.

Fourth, the federal tax credit is subtracted from the gross federal tax to get the net federal tax. Eleanora’s net federal tax is $200.10 - $103.64 = $96.46.

Therefore, Eleanora will pay $96.46 in federal tax on her dividend. References: How Dividends Are Taxed and Reported on Tax Returns - Investopedia, Dividend Tax Credit in Canada - TurboTax

Anchoring bias occurs when an investor fixates on a reference point (e.g., purchase price) and refuses to sell until the investment returns to that level, even if conditions have changed .

Julia anchors on $25.44, her purchase price, and won’t sell at $19.72.

Availability bias = reliance on recent/easy info.

Representativeness = stereotyping based on limited traits.

Hindsight bias = belief that past events were predictable.

Thus, Julia demonstrates Anchoring bias.

Contractionary monetary policy is used when the economy is overheating or facing inflationary pressure.

The Bank of Canada increases interest rates, which leads to reduced borrowing and lending.

This action decreases the money supply in circulation and reduces the availability of credit to consumers and businesses.

Therefore, the correct effect of contractionary monetary policy is that it reduces both money supply and credit in the economy.

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]