Gotcha! Spot­ting the traps in last week’s quiz

The Globe and Mail (Prairie Edition) - - GLOBE INVESTOR - JOHN HEINZL IN­VESTOR CLINIC jheinzl@globe­and­mail.com Fol­low me on Twit­ter: @JohnHeinzl

Thanks

to every­one who took In­vestor Clinic’s sev­enth an­nual back-to-school in­vest­ing and money quiz. If you missed last week’s quiz, you can still take it (tgam.ca/quiz17).

As promised, today I’ll ex­plain some of the more chal­leng­ing ques­tions. Based on the feed­back I re­ceived from read­ers, some of the traps I laid were ex­tremely ef­fec­tive. Let’s start with ques­tion No. 6, which prompted the most e-mails from read­ers, some of whom in­sisted that my an­swer was wrong. Dave holds 100 shares of John­son & John­son in his TFSA. If J&J de­clares a quar­terly div­i­dend of 84 cents (U.S.), how much will Dave re­ceive if his bro­ker con­verts U.S. cash at an ex­change rate of 80 cents (U.S.) for every \$1 (Cana­dian)? a) \$67.20 (Cana­dian) b) \$89.25 (Cana­dian) c) \$98.55 (Cana­dian)

d) \$105 (Cana­dian) Many read­ers chose d) \$105, which is in­cor­rect. They mul­ti­plied J&J’s div­i­dend of 84 cents (U.S.) by 100 shares, then divided the prod­uct of \$84 by the Cana­dian dol­lar’s value of 80 cents to get \$105 (Cana­dian). And that would be cor­rect, ex­cept for one thing: In a tax-free sav­ings ac­count, U.S. div­i­dends are sub­ject to a 15-per-cent U.S. with­hold­ing tax. Dave would there­fore re­ceive \$71.40 (U.S.) – i.e., 85 per cent of \$84 – which works out to an­swer b) \$89.25 (Cana­dian).

Keep in mind that U.S. with­hold­ing tax also ap­plies to reg­is­tered ed­u­ca­tion sav­ings plans, as well as to non-reg­is­tered ac­counts. The only way to avoid with­hold­ing tax is to hold your U.S. div­i­dend stocks in a reg­is­tered ac­count that is specif­i­cally for re­tire­ment pur­poses, such as an RRSP, RRIF or LIRA. These ac­counts are ex­empt from with­hold­ing tax un­der the U.S.-Canada tax treaty. Sev­eral read­ers were also tripped up by ques­tion No. 12: On Aug. 23, Royal Bank of Canada raised its quar­terly div­i­dend by 4 cents to 91 cents a share, payable on Nov. 24 to share­hold­ers of record on Oct. 26. To re­ceive the div­i­dend, an in­vestor would need to buy the shares: a) On or be­fore Nov. 21 b) On or be­fore Oct 25 c) On or be­fore Oct. 24 d) On or be­fore Oct. 23 To get the cor­rect an­swer, you would need to know about a re­cent change in the set­tle­ment pe­riod for stock trades. Pre­vi­ously, trades set­tled – that is, shares and cash ac­tu­ally changed hands – three days af­ter the trade date. This was known as “T+3”. As of Sept. 5, how­ever, the set­tle­ment pe­riod was short­ened to two days, or “T+2”.