LLQP Segregated Funds & Annuities · Component 1.2 · 35% of the exam
A client's non-registered portfolio holds a fund with a large unrealized gain. In the review this matters because:
- Selling triggers a taxable gain, which is a real cost of any recommendation to switch
- BThe gain is taxed annually whether or not the client sells, so switching has no tax cost
- CThe gain may be transferred to a registered plan without any tax consequence
- DUnrealized gains are never taxed, since the client has not received any money
Correct answer: A) Selling triggers a taxable gain, which is a real cost of any recommendation to switch
A switch out of a non-registered holding is a disposition, so the tax on the accrued gain has to be weighed against whatever the new recommendation offers.
Why the other options are wrong
- BUnrealized gains on a mutual fund are not taxed until disposition.
- CA transfer in kind to a registered plan is itself a disposition.
- DThe gain is taxed when the holding is sold.
Exam tip
Every non-registered switch has a tax bill attached.
Common mistake
Recommending a switch without calculating the tax on the sale.
What this tests
CISRO competency component 1.2 — Assess the client's needs and situation — which is weighted at 35% of the Segregated Funds & Annuities module. Written against the published curriculum.
More from component 1
- The first step before recommending a segregated fund or annuity is to:
- A client's 'time horizon' for an investment is:
- 'Risk tolerance' in an investor profile refers to:
- A client says he wants 'high returns with no risk of losing money'. The agent should:
- Investment objectives are commonly classified as:
- Why is the client's marginal tax rate relevant to a segregated fund recommendation?
Practice the whole Segregated Funds & Annuities module
Timed sets weighted like the exam, and review of every question you miss. Free to start.