FINA2000 - Quiz #3 Review

What are the four types of taxes?

Purchase, property, wealth and earnings

What are the steps you must take for filing federal/provincial income?

Determine whether we are required, which form serves our needs and if we are required to submit additional schedules/forms.

Taxs Forms/Filing Information

Includes current tax forms and instructions; social insurance numbers of households, copies of federal tax returns, and reference books on tax laws/techniques

Income Records

Includes T4 forms, T4A forms, T5 forms and forms including self-employment.

T4 Forms

A type of form that reports salary, wages and taxes withheld.

T4A Forms

A type of form that reports pension income. Issued to non-employment income, commissions, scholarships and lump-sum payments.

T5 Forms

A type of form that reports interest, dividends and captial gains/losses from savings and investments. Includes bank interest and royalty income.

Expense Records

A record that includes receipts for medical/dependant care, charitable donations, investment interest, business investment and rental-property expenses.

How long should you keep tax records for?

Three years for the days we receive notices, seven years to keep backup documentation if the occassion rises.

What are the steps for computing taxable income and tax liability?

Determine total income, net income, taxable income, federal taxes owing, and then net federal tax.

What does total income consist of?

It consists of five main points: employment income, net business, investment, taxable capital gains and other income (retirement, old age, canada pension, employment insurance).

Net Income

The total income reduced by certain deductions. Includes contributions to RRSP/RRP/IPPs, unions, childcare expenses, disability supports, moving and losses/interest paid.

Taxable Income

The net amount of income after allowable deductions on which income tax is computed. Additional deductions/losses carried forward from prior years as well.

Marginal Tax Rate (MTR)

The rate of tax paid on the next dollar of taxable income. The percentage of what we pay on the last dollar of income we earn. Applies only to the highest slice of income.

Average Tax Rate (ATR)

The total tax due divided by total income. Is always lower than the marginal tax rate; total tax paid divided by total taxable income.

Tax Credit

A credit which includes an amount subtracted directly from the amount of taxes owing.

Non-Refundable Tax Credits

A credit that is subtracted from the amount of taxes owed, but can NEVER reduce federal tax below zero.

Refundable Tax Credits

A credit that is refunded to individuals if they qualify, even if their tax liability is zero.

Tax Planning

The use of legitmate methods to reduce one's taxes.

Tax Evasion

The use of ILLEGIAL actions to reduce one's taxes.

How can we maximize after-tax cash flows with the strategies provided?

We can see if we are choosing the form most advantaegous to us, taking full advantage of deductions and credits avaliable, and seek possibilities to defer payment of taxes.

Tax Free Savings Account (TFSA)

An account that can grow tax free both through contributions and withdrawals. Not considered when determining eligibility for federal income, and is subject to restrictions similar to RRSP/RSPs.

First Time Home Savings Account (FHSA)

An account designed to help Canadians save for a principal residence. Can contribute up to 8K annually with 40K lifetime limit, which must be used in 15 years.

How can we maximize the benefits of deductions and tax credits?

Be aware of current tax laws and regulations, use contributions to retirement plans, and maximize our contribution each year.

What must we be aware when we are attempting to maximize benefits of deductions and tax credits?

Be aware of tax treatments towards stock options/capital losses/gains; all people qualify for personal deduction amounts and can claim for eligible dependents.

What are some tax deferral techniques?

RRSPs, RPPs, IPPs, DPSPs, RESPs, and investiments in capital assets.

Income Splitting Techniques

An effective tax-planning strategy that reduces overall tax burdens. Legal means include contributions to RRSP, splitting CPP/QPP benefits, using transfers assets for generating business income.

What are some techniques used that help with income splitting techniques?

Some methods include opening an RESP/RDSP, set an in-trust investment for children/minor, invest in federal child tax benefits and transfer assets to adult children you may have.

Why must we ensure that our portfolio is tax efficient?

It allows us to maximize after-tax returns, prevents unnecessary wealth erosion and accelerates long-term compounding. Divdends/capital gains taxed less heavily.

What should students learn, regarding the “tax issue” that they face?

Learn how to report income from scholarships/bursaires/fellowships, get common deductions like moving expenses, identify non-refundable tax credits like tuition, and identify other tax credits like GST/HST.

EFILE (CRA System)

A service that lets authorized service providers to return information to the CRA and send individual income tax from software used to prepare tax returns.

NETFILE

A service that is provided by the CRA; allows individual canadians to submit their own personal income tax returns directly over the internet.

Tax Audits

A detailed exmaination of our return for Canada Customs and Revene Agencies. Keeps detail records of receipts, cancelled cheques, and request most of your financial taxable information.

What is the top filling error through the audit process?

Mathematical errors- such as transposition, adding or subtracting amounts incorrectly.

Desk Audit

A type of audit that evaluates from an auditor/specialist desk, rather than online. A document review mailed or conducted at a remote desk for clarification.

Field Audit

A type of audit that is in-person, on-site examination that is conducted directly. May request only specific information and visit for specific records.

What are some of your audit rights?

The auditor themselves can only request specific information; you have the right to seek assistance from a professional advisors, and that reassessment cannot go back more than three years- EXCEPT in cases of fraud/misrepresentation.

When establishing investment goals, what are some things you need to ask yourself?

How much money we need, how will we obtain it, what risk are we willing to assume, what we are willing to sacrifice, what conditions may affect our goals, the consequences, and think if our goals are reasonable.

When preparing for an investment program, what are the things we must consider through a financial checkup?

How we live within our means, obtain adequate insurance protection, start an emergency fund we can access, have access to other sources of cash for emergencies.

Risk Tolerance

The amount of psychological pain we are willing to suffer for our investments. Risks associated include the loss of principal, purchasing power decreasing, and the possibility of not receiving the return expected.

What are some examples of safe investments?

Savings accounts, government saving bonds, treasury bills, GICs, term deposits and negotiable government/corporate bonds.

How does time value of money lead to long-term investment succeed?

The rate of return and the length of time invested will allow for small amounts of regular investments will become large amounts overtime.

Speculative Risk

A high risk investment made in hopes of earning relatively large profits in a short period of time.

What are some examples of higher potential income investments?

Speculative stocks, commodities, options, precious metals/stones, mutual funds/ETFs, real estate and collectibles.

Business Failure Risk

A risk that refers to the likeilhood that a company will cease operations, go bankrupt, or experience terminal insolvency.

Inflation Risk

A risk that is also referred to as “purchasing power risks". The danger that rising prices of goods and services will erode real value of our money.

Interest Rate Risk

A risk that includes the potential of financial loss caused by fluctuations in the market interest. Affects fixed-income securities like bonds, along with corporate borrowing and banking operations.

Market Risk

A risk that is also referred to as “systematic risk". The possibility of losing finances due to market conditions like changes in asset prices, exchange rates or volatility.

Global Investment Risk

A risk that involves the uncertainity and potential of financial loss from international markets due to economic, political and structural factors.

Investment Liquidity

An investment that allows the ability to buy or sell an investment quickly without affecting the investment's value.

Equity Financing

A financial process of raising capital by selling partial ownership/shares of a business to investors for cash. Capital provided by stockholders.

Stock

A certificate that represents fractional onwership in a corporation, giving holders claim on company assets and earnings.

Equity Capital

A capital that is the money that a business obtains from its owners. Corporation not required to repay the money obtained from the sale of stock or dividends to stockholders.

Dividend

A distribution of money, stocks, or other property that a corporation pays to shareholders.

Bonds

A loan to a corporation, the federal government, or a municipality. A fixed-income that represents a loan made by an investor or borrower.

Mutual Funds

A professionally managed investment program that pools money from different investors to pruchase diversied basket of assets. Funds range from conservative to extremely speculative.

Segregated Funds

An investment product that is wrapped an insurance contract, sold usually by life insurance companies. In the form of an annuity can be bought/sold at any time.

Real Estate Invest Trust (REIT)

A trust that is issued in the stock market and is designed to pay out money generated from a business, or a set of investments through cash disbursements. Can produce constant funds for investors.

Securitization

A process in which debt is passed on to entities that break them into bonds and sell them. Includes credit card/wholesale receivables, retial and installment receivables.

Securitized Debt Instruments (SDIs)

A type of financial securitiy that backs up principal and interest payments towards a pooled collection of debts or iilliquid assets. Examples include asset-backed securities, mortgage-backed securities.

What are some examples of typical speculative investments?

Call/put options, derivaties, commodities, hedge funds, coins and stamps, metals/gemstones, and antiques/collectibles

Derivatives (Stock)

A financial contract that value comes from the performance of an asset, like a individual company stock, bond or market index.

Call Options

A type of derivative that gives you the right to buy a stock at a set price before a specific expiration date.

Put Options

A type of derivative that gives you the right to sell a stock at a set price before specific expiration dates are reached.

Hedge Funds

A private pooled investment vehicle that collects capital from investors and high net-worth individuals to trade liquid assets using flexible strategies.

Diversification

The spreading of assets among several types of investments to lessen financial risk gained.

Personal Investment Plans

A type of plan that establishes goals and determines the amount of money needed to obtain them. Evaluates risk and return on different investments; essentially follows the “SMART" rule.

In terms of lowest to highest risk, what is the ranking of diversification?

LV1 to LV4: Financial security, safety and income, growth and speculaton.

To be an successful investor, what things must you follow to develop a plan?

Establish goals, determine the amount of money needed, specify the amount we have, list different investments to evaluate, consider risk factors and return, reduce possible investments, choose two different investments, and continue evaluation.

What is the role of a financial planner?

They hold a role to provide help to those seeking it- such as stockbrokers, lawyers, accountants, bankers, and insurance agents. They can provide advice- but you must be aware of how they are paid and how it influences them.

What is your role throughout the entire investment process?

We must play the role in evaluatng potential investments, monitoring investments, keep records, be aware of tax considerations and keep track of capital gains/losses.

Index

A statistical measure of changes in a portfolio of stocks- which represent a portion of the overall market. Can include S&P/TSX, composite indexes and averages.

What is the highest investment that represents common stocks?

Financials; at a rate of 32.3%. Behind it is energy and industrial.

Public Corporations

A common stock that is traded openly in stock markets can be purchased by individuals. Avaliable to the public.

Private Corporations

A common stock that is not avaliable for trade publicly in stock markets. Owned by relatively few people.

Proxy

A legal form that lists the issues to be decided at a shareholder's meeting and requests transferring voting rights to another.

Pre-emptive Right

The right to current shareholders to purcahse any new stock the corporation issues BEFORE it is offered to the general public.

Why do investors purchase common stocks?

For income from dividends, the changes in stock value that appreciate over time, and the potential increase of value from stock splits.

Stock Splits

A procedure in which the shares of common stocks owned by exisiting shareholders are divided into a larger number of shares.

Preferred Stocks

A type of equity security that represents PARTIAL ownership in a corporation, utilizing traits of both stocks and bonds. Prioritizes on cash dividends to preferred individuals before distribution to common stockholders.

Par Value

An assigned dollar value printed on a stock certificate. Often seen in investments towards preferred stocks.

Callable Preferred Stock

A type of preferred stock that a corporation may exchange for a specified amount of money. Can issue new preferred stocks with a lower dividend.

Cumulative Features (Preferred Stocks)

A feature for preferred stocks that allows for unpaid cash divdends to accumulate; must be paid before any cash dividends are paid to common stockholders.

Participation Feature (Preferred Stocks)

A feature of preferred stocks that are rare forms of investments used to attract investors. Can share in earnings beyond the stated dividend amount.

Conversion Feature (Preferred Stocks)

A feature of preferred stocks that can be traded for shares of a common stock. Gives the shareholder the option to exchange preferred shares for a numberr of common stock shares.

Stock Valuation

The process of calculating fair values of a company's shares to determine whether a stock os overvalued or undervalued. Important to understand different approaches to analyze stocks.

Fundamental Analysis

A stock valuation strategy that values stocks by looking at micro/macro factors that could influence economic value of stocks.

Technical Analysis

A stock valuation strategy that holds the idea that changes in investor sentiments are responsible for changes in trends. States that values of stocks can be predicted by extrapolating prices from patterns.

Efficient Market Hypothesis

A stock valuation strategy that states future prices cannot be predicted from past trends and patterns.

What are the three methods of evaluating stock investments?

The methods include fundamental analysis, technical analysis, and efficient market hypothesises.

Blue Chip Stock

A classification of stock investment that is safe in strong/respected companies. Attracts conservative investors; examples include Bell Canada and Royal Bank.

Income Stock

A classification of a stock investment that pays higher than the average dividend; this includes utility stocks as example.

Growth Stocks

A classification of a stock investment that earns above average profits of all firms in the economy. 30% or less are paid out as dividends with rest reinvested in research/development. Examples include Airlines and Home Depot.

Cyclical Stock

A classification of stock investments that follows the business cycle of advances and declines in the economy. Examples include automobiles, timber and steel.

Defensive Stock

A classification of a investment stock that remains stable during declines in the economy. Examples include Keloog, Procter and Gamble/utility stocks.

Large Cap Stocks

A type of classified stock investment that is issued by large corporations with large stock outstanding/large amounts of capitalization.

Capitalization

The total amount of securities (stocks and bonds) issued by a corporation.

Small Cap Stocks

A type of classified stock investment that is issued by a company with a capitalization of 150 MILLION or LESS.

Penny Stocks

A type of classified stock investment that typically sells for less than $1 per share.

What are some key websites/sources that can help you evaluate a corporation's stock?

Financial posts, market watches, TMXs, value lines and “standard/poors".