LLQP Segregated Funds & Annuities · Component 2.3 · 30% of the exam
The 'exclusion ratio' concept underlying prescribed annuity taxation means:
- ATax is deferred until the annuitant's death, when the accumulated interest is reported on the final return in a single amount
- A fixed portion of each payment is tax-free return of capital and the balance is taxable interest
- CNo tax applies to the payments, since the capital was taxed before the annuity was purchased
- DAll payments are fully taxable as income, since the annuity is a stream of interest on the premium
Correct answer: B) A fixed portion of each payment is tax-free return of capital and the balance is taxable interest
Level taxation is the advantage of prescribed annuities; it results from spreading the capital return evenly.
Why the other options are wrong
- ATax is paid annually on the interest portion.
- CThe interest portion of each prescribed annuity payment is taxable.
- DOnly the interest portion is taxable.
Exam tip
Prescribed: constant taxable/non-taxable split per payment.
Common mistake
Applying the split to a registered annuity (fully taxable).
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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