Question

Linda Milner, an Alberta investor, recelves $40,000 in dividends from Okotoks Forest Products shares, $20,000 in interest from a deposit in a chartered bank, and a $20,000 capital gain from Cremona Mines shares. Ms. Miner's federal tax rate is 29%. Use the information in Table 25 and Table 2.6. Calculate the after-tax cash flow from each investment. (Omit $ sign in your response.)

Answer 1

After applying a 29% federal tax rate to the dividends, interest, and only 50% of the capital gain that Linda Milner received, the after-tax cash flows are $28,400 from dividends, $14,200 from interest, and $17,100 from the capital gain.

Step-by-step explanation:

Calculating the after-tax cash flow from each investment made by Linda Milner involves understanding how dividends, interest, and capital gains are taxed. In the scenario, she receives $40,000 in dividends, $20,000 in interest, and a $20,000 capital gain. Since details on the taxation rate for each type of income were not provided, we will only apply the federal tax rate of 29% for simplicity, although in reality, dividends and capital gains might be taxed at different rates.

For the dividends, the after-tax cash flow is dividends minus the tax paid on them: $40,000 - ($40,000 × 0.29) = $28,400.

For interest income, it's calculated in a similar manner: $20,000 - ($20,000 × 0.29) = $14,200.

Finally, only 50% of the capital gain is taxable for individuals, therefore the tax on the capital gain is on $10,000 (half of $20,000), and the after-tax gain becomes: $20,000 - ($10,000 × 0.29) = $17,100.

All values calculated assuming the federal tax applies equally to all forms of investment income for ease of computation.