LLQP Segregated Funds & Annuities · Component 2.2 · 30% of the exam
For tax purposes, a non-registered segregated fund allocates income and capital gains/losses to the contract holder annually. Compared with mutual funds, a key difference is:
- ASegregated funds are tax-free, since the income is earned by the insurer rather than by the client
- BThere is no difference, since both are flow-through vehicles taxed identically in the holder's hands
- Segregated funds can allocate capital losses to holders, and allocate by time in the fund
- DMutual funds pay no tax at all, while segregated funds pay tax at the fund level before allocation
Correct answer: C) Segregated funds can allocate capital losses to holders, and allocate by time in the fund
Loss flow-through and time-weighted allocation are technical but real differences. Both preserve income character.
Why the other options are wrong
- AAllocations are taxable to the contract holder.
- BLoss treatment and the basis of allocation differ.
- DMutual fund distributions are taxable to the unitholder.
Exam tip
Seg funds allocate losses; mutual funds cannot.
Common mistake
Describing seg fund taxation as identical to mutual funds.
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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