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Answer: 40%
**Explanation:** Option B is correct because: - In a dividend imputation system, corporate taxes paid are credited to shareholders - The shareholder's effective tax rate equals their marginal tax rate (40%) minus the corporate tax credit - Calculation: 40% (marginal tax rate) - 25% (corporate tax credit) = 15% additional tax - However, the question asks for the effective tax rate on dividends, which in an imputation system equals the shareholder's marginal tax rate - The shareholder pays tax at their marginal rate, but receives credit for corporate taxes already paid
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A corporation operates in a jurisdiction that has a corporate tax rate of 25% and uses a dividend imputation tax system. If the corporation distributes all its after-tax income to shareholders, the effective tax rate on dividends of a shareholder whose marginal tax rate is 40% is:
A
25%
B
40%
C
55%