LLQP Segregated Funds & Annuities · Component 2.2 · 30% of the exam
When a segregated fund guarantee 'tops up' the value at maturity or death, the top-up is:
- ATax-free, since it is an insurance benefit paid from the insurer's own funds
- BA dividend from the insurer, eligible for the dividend tax credit in a non-registered contract
- CInterest income, since the insurer pays it as compensation for the shortfall in the fund's return
- Generally a capital gain, or a reduction of a capital loss, in a non-registered contract
Correct answer: D) Generally a capital gain, or a reduction of a capital loss, in a non-registered contract
The tax treatment of top-ups has been clarified by insurers and CRA practice as adjustments to proceeds of disposition, producing capital gain treatment.
Why the other options are wrong
- ANon-registered top-ups have tax consequences.
- BA guarantee top-up is not a dividend.
- CA guarantee top-up is not treated as interest income.
Exam tip
Top-up → capital gain treatment (non-registered).
Common mistake
Promising a tax-free guarantee top-up.
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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