LLQP Segregated Funds & Annuities · Component 2.2 · 30% of the exam
An insurer pays a top-up under the death benefit guarantee on a non-registered segregated fund. For tax purposes the top-up is:
- allocated as taxable income to the contract, since the guarantee is not life insurance proceeds
- Bexempt from tax because life insurance death benefits are never taxable in Canada
- Ctaxed as a capital gain in the beneficiary's own hands in the year the payment is made
- Dtreated as a tax-free capital receipt in the hands of the beneficiary in every situation
Correct answer: A) allocated as taxable income to the contract, since the guarantee is not life insurance proceeds
A guarantee top-up on a non-registered segregated fund is not a life insurance death benefit. The amount is allocated to the contract and reported as income, which surprises clients who expect the treatment of a life policy.
Why the other options are wrong
- BThe exemption for life insurance death benefits does not extend to a fund guarantee.
- CThe amount is allocated to the contract rather than taxed to the beneficiary as a gain.
- DSegregated fund guarantee top-ups are not received free of tax by the beneficiary.
Exam tip
A guarantee top-up is investment income, not a tax-free life insurance death benefit.
Common mistake
Applying the tax treatment of a life policy to a segregated fund guarantee.
What this tests
CISRO competency component 2.2 — 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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