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WME Exam Prep Questions: CSI/Foran WME Quiz Workbook and Case Study Workbook

This document provides sample questions from the WME Exam Prep Materials. It advertises additional study resources like workbooks and seminars to help pass the WME Exam. The next seminar will be held March 11-15. Two multiple choice questions from chapters 8 and 10 of the materials are then provided. The answers explain the tax treatment of gifts of shares between spouses and how to calculate the guarantee reduction and new guarantee for a segregated fund redemption.

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721 views3 pages

WME Exam Prep Questions: CSI/Foran WME Quiz Workbook and Case Study Workbook

This document provides sample questions from the WME Exam Prep Materials. It advertises additional study resources like workbooks and seminars to help pass the WME Exam. The next seminar will be held March 11-15. Two multiple choice questions from chapters 8 and 10 of the materials are then provided. The answers explain the tax treatment of gifts of shares between spouses and how to calculate the guarantee reduction and new guarantee for a segregated fund redemption.

Uploaded by

Petraneo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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WME Exam Prep Questions

This will be the last post for our January WME seminar. These questions are a small sample
from our WME Materials, which Foran cobrands with CSI. If you are looking for extra
support to pass your WME Exam, check out the CSI/Foran WME Quiz Workbook and Case
Study Workbook or register for one of our seminars. Our next seminar for the WME runs
March 11-15.
Good luck with your studying!

Chapter 8

1. In 2012, Mr. Good gifted shares to his wife. The shares cost him $10,000. At the
point of gifting, these shares had a fair market value of $12,000. Mrs. Good
subsequently earned dividend income of $1,200 on these shares. She later sold the
shares for $15,000. Which of the following statements is (are) correct?

I. Mr. Good will be taxed on a capital gain of $2,000 on the transfer to his spouse, and Mrs.
Good will be taxed on a capital gain of $3,000 when she sells the shares.
II. Mr. Good will report a capital gain of $5,000 when Mrs. Good sells the shares.
III. No capital gain will result until the shares are actually sold by Mrs. Good.
IV. Mr. Good will be subject to tax on the dividend income his spouse receives.

a) I, III
b) II, III
c) I, IV
d) II, III, IV

Chapter 10

2. Investor Dianne purchased $10,000 worth of ABC Life Insurance Company


segregated fund units that have the minimum government guarantee. She eventually
redeems $4,000 worth of her units when the total market value of the units is
$16,000. What is the guarantee reduction and the new guarantee?

a) $2,500 ; $7,500
b) $2,175 ; $4,225
c) $1,875; $5,625
d) $2,500 ; $5,000

Answers

1. d) II, III and IV


For spouses the attribution rules apply as follows:

Unless an election to transfer at fair market value (FMV) is made by the transferor (Mr.
Good), and fair market value consideration is received by the transferor from the
transferee, property income (dividends, interest, rents, royalties, etc.) and capital
gains/losses of the transferee (Mrs. Good) attribute back to the transferor and are included
in the transferor’s income. This results while the couple is married and the transferor is
resident in Canada. Therefore, in the above example dividends received and capital gains
realized by Mrs. Good are included in Mr. Good’s income.

How spousal transfer occurs under the Income Tax Act.

There are two ways a transfer occurs:

• Section 73 – At tax cost. This is automatic unless an election is made by the transferor.
This method is explained under i), following.

• Section 69 – At fair market value. This results when an election is made by the transferor
(Mr. Good) to opt out of section 73 (the automatic transfer at tax cost). This method is
explained under ii), following.

i) At ACB (automatic) (s73)

– There is no capital gain (loss) to the transferor on the transfer. The capital gain/loss is
deferred until the transferee disposes of the property. Attribution always applies (e.g., back
to Mr. Good) to property income earned by the transferee spouse (Mrs. Good) after the
transfer and to subsequent capital gains/losses when the transferee spouse (Mrs. Good)
disposes of the capital property.

– ACB of the transferor (Mr. Good) becomes ACB of the transferee (Mrs. Good)

Mr. Good example: Automatic transfer at ACB

Proceeds to Mr. Good $10,000


ACB of shares $10,000
Capital gain (Mr. Good) NIL
– Under Section 73, ITA, Mr. Good defers paying tax until his spouse sells the shares.

ACB to transferee (Mrs. Good) $10,000


Dividend income (property income) earned by Mrs. Good attributes back to

Mr. Good (included in his income) $1,200


Capital gain on subsequent sale by Mrs. Good (transferee) also attributes back to Mr. Good
(transferor)

Proceeds $15,000
ACB 10,000
Capital gain $5,000
ii) Transferor elects to transfer at fair market value (s69)
– The transferor (Mr. Good) recognizes a capital gain on the transfer and the transferor
must pay tax if there is a gain.

– There will be no attribution if FMV consideration is received by the transferor (cash paid
or debt issued with interest at the prescribed or commercial interest rate charged and paid
within 30 days of the year end) – otherwise, attribution applies. If Mrs. Good paid $12,000
for the shares or provided a promissory note to pay $12,000, using at least the prescribed
or commercial interest rate, and paid interest as promised within 30 days of the year end,
there would be no attribution of property income or subsequent capital gains back to Mr.
Good.

2. c) $1,875; $5,625

Original guarantee is 75% of $10,000 or $7,500.


The guarantee reduction is 25% based on the percentage of units redeemed, determined as
follows:
= Market value of units redeemed/Total market value of units at redemption
= 25% [$4,000/$16,000 x 100]

Guarantee reduction equals 25% of the original guarantee


= $1,875 [$7,500 × 0.25]
New guarantee = Original guarantee minus reduction
New guarantee is $5,625 [$7,500 – $1,875]

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