Final answer:
The effective tax exemption of investment income in Canada occurs when the investment is within a registered retirement savings plan (RRSP), where normal taxable income from investments is not immediately taxed but deferred until withdrawal.
Step-by-step explanation:
When does the Canadian Personal Income Tax result in the effective tax exemption of investment income? The correct answer to this question is B. When the investment is held within a registered retirement savings plan (RRSP). Investment income in an RRSP is tax-sheltered and is not taxed annually as long as the funds remain in the plan; they are only taxed upon withdrawal, which is typically done during retirement when the individual may be in a lower tax bracket.
The formula for taxable income can generally be represented as:
taxable income = adjusted gross income - (deduction + exemption)
However, within an RRSP, where assets grow on a tax-deferred basis, normal taxable income from investments (such as capital gains, dividends, and interest) is not included in annual income and consequently, not subject to immediate taxation. Instead, taxation is deferred until the funds are withdrawn from the RRSP.