LLQP Segregated Funds & Annuities · Component 2.3 · 30% of the exam
A retiree buys a prescribed non-registered annuity. The tax feature that makes this attractive is that:
- Athe entire payment is received free of tax for the whole of the annuitant's remaining lifetime
- Bthe taxable portion is highest in the first years and then falls away to nothing over time
- the taxable portion is level each year, being lower in the early years than under accrual taxation
- Dthe payments are taxed as a capital gain, so only half of each payment is ever included
Correct answer: C) the taxable portion is level each year, being lower in the early years than under accrual taxation
Prescribed taxation blends the return of capital and the interest evenly across the payments, so the taxable amount stays constant. Accrual taxation front-loads the interest, producing more tax in the early years when the client may least want it.
Why the other options are wrong
- AOnly the capital portion is untaxed; the interest element is always included in income.
- BThat describes accrual taxation, which is the less favourable treatment for the client.
- DAnnuity interest is taxed as ordinary income, not as a capital gain.
Exam tip
Prescribed equals level taxable portion; accrual equals interest front-loaded.
Common mistake
Assuming any non-registered annuity automatically qualifies for prescribed treatment.
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
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