Taxation of Investments
Practice Questions
1) You have $1,000 in a bank account earning an interest rate of 3.5%. How much interest income will you
generate in year one? How much tax will you pay assuming that you earn $80,000 per year? (For 2014,
this marginal tax rate is 32.98%)
Calculation
Answer
Amount of interest earned
Amount of taxes payable on
interest income
Value of investment at year
end
After Tax Rate of Return
2) You have $750 in a bank account earning an interest rate of 2.5%. How much interest income will you
generate in one year? How much tax will you pay assuming that you earn $100 000 per year? (For
2014, this marginal tax rate is 43.41%).
Calculation
Answer
Amount of interest earned
Amount of taxes payable on
interest income
Value of investment at year
end
After Tax Rate of Return
3) You sell your rental property that is currently valued at $400 000. You paid $375 000 for this rental
property three years ago. Calculate the capital gain/loss on this property. Assuming you earn $75 000
this year (32.98% tax rate), how much tax will be payable on this investment?
4) You purchase 50 shares of company xyz for $10.00 per share at the beginning of the year. You sell all
50 shares of Company XYZ for $11.00 per share on December 31st of that same year. Company XYZ
pays a dividend of $1.50 per share during the year. The shares were sold after the dividend was paid.
Calculate the amount of the dividend paid and the amount of tax payable on this dividend income, as
well as the value of your investment on December 31st of the year. You currently earn $85 000 per year
(in 2014 the marginal tax bracket was 39.41%).
Calculation
Amount Paid for shares
Amount of dividend
Tax Payable on Dividend
Gross up by
38%
Amount of tax
that would
otherwise be
paid
Dividend Tax
Credit (15%) of
gross up
Tax Payable
Capital Gain/Loss
Tax Payable on Capital Gain
Total Value of Investment
Answer
5) You purchase 200 shares of Company A for $5.00 per share at the beginning of the year. You sell all 200
shares of Company A for $5.40 per share on December 31st of that same year. Company A pays a
dividend of $2.00 per share during the year. The shares were sold after the dividend was paid.
Calculate the amount of the dividend paid and the amount of tax payable on this dividend income, as
well as the value of your investment on December 31st of the year. You currently earn $80 000 per year
(in 2014 the marginal tax bracket was 32.98%).
Calculation
Amount Paid for shares
Amount of dividend
Tax Payable on Dividend
Gross up by
38%
Amount of tax
that would
otherwise be
paid
Dividend Tax
Credit (15%) of
gross up
Tax Payable
Capital Gain/Loss
Tax Payable on Capital Gain
Total Value of Investment
Answer