LLQP Segregated Funds & Annuities · Component 2.3 · 30% of the exam
A non-prescribed (accrual-taxed) non-registered annuity:
- Has the interest element taxed as it accrues, front-loading taxable income in early years
- BIs never used in practice, since every insurer structures non-registered annuities as prescribed
- CIs taxed as capital gains, since the payments are a disposition of the client's capital
- DIs tax-free, since accrual taxation applies only to deposits rather than to annuity contracts
Correct answer: A) Has the interest element taxed as it accrues, front-loading taxable income in early years
Accrual taxation applies to annuities that fail prescribed conditions (for example, indexed or corporate-owned). The tax is higher early and lower later.
Why the other options are wrong
- BAccrual annuities exist, especially deferred and indexed ones.
- CThe interest element is taxed as interest, not capital gains.
- DThe interest element is fully taxable as earned.
Exam tip
Accrual = interest taxed as earned; prescribed = levelled.
Common mistake
Not checking whether a client's annuity is prescribed before projecting after-tax income.
What this tests
CISRO competency component 2.3 — Analyze the available products that meet the client's needs — which is weighted at 30% of the Segregated Funds & Annuities module. Written against the published curriculum.
More from component 2
- A segregated fund's 'guaranteed amount' after a partial withdrawal under proportional reduction is:
- A distinctive estate advantage of a segregated fund over a non-registered mutual fund held jointly with a child is:
- Segregated fund guarantees are most valuable relative to their cost when:
- A segregated fund's annual statement reports:
- Compared with a segregated fund, an exchange-traded fund (ETF) generally offers:
- A segregated fund's 'automatic death benefit reset' feature:
Practice the whole Segregated Funds & Annuities module
Timed sets weighted like the exam, and review of every question you miss. Free to start.