Canadian securities exam -WME Course For Financial Planners (WME-FP) – Quiz-04

Correct Answer (c): Dividends from Canadian corporations benefit from a dividend tax credit, which is designed to reduce double taxation by accounting for the corporate tax already paid by the company. This effectively reduces the overall tax rate on dividend income.Incorrect Answers:(a): Dividends from Canadian corporations are not fully taxed at the marginal tax rate; the dividend tax credit applies.(b): Rental income is taxed at the individual’s marginal tax rate, not a flat rate.(d): Rental income is taxable in the year it is earned, regardless of whether it is reinvested in the rental property.Relevant Law: Income Tax Act, sections dealing with the taxation of dividends (e.g., section 82 and section 121).

Correct Answer (b): Diversifying the portfolio reduces the risk associated with overexposure to one asset class. As Mr. Lee is nearing retirement, a balanced mix of assets can help protect his wealth against market volatility and provide a steady income stream.Incorrect Answers:(a): Increasing investment in real estate would further concentrate risk rather than reduce it.(c): Liquidating all real estate holdings to invest solely in fixed-income securities could overly reduce growth potential and may not be the most effective strategy for long-term income.(d): Keeping the current strategy unchanged may not address the need for diversification, which is essential for managing risk, especially nearing retirement.Relevant Law: There are no specific laws mandating portfolio diversification, but principles from Modern Portfolio Theory (MPT) and guidelines from financial regulatory bodies like the Canadian Securities Administrators (CSA) emphasize the importance of diversification.

Correct Answer (b): RRSP contributions made within the first 60 days of the calendar year can be applied to either the previous year’s or the current year’s tax return, providing flexibility in tax planning.Incorrect Answers:(a): Contributions can only be made until the end of the year in which the contributor turns 71, not 65.(c): There is an annual contribution limit set by the Canada Revenue Agency (CRA), which is the lesser of 18% of the previous year’s earned income or the annual maximum dollar limit.(d): While contributions are capped at 18% of the previous year’s earned income, they are also subject to an annual maximum dollar limit.Relevant Law: Income Tax Act, section 146, which outlines the rules and regulations governing RRSPs.

Correct Answer (c): A mix of low-volatility stocks, government bonds, and cash provides a balanced approach to preserving wealth. Government bonds and cash offer stability, while low-volatility stocks can provide steady returns with reduced risk.Incorrect Answers:(a): Holding all assets in cash can protect against immediate market downturns but offers no growth potential and may not keep up with inflation.(b): High-yield corporate bonds carry higher risk and may not be suitable during economic downturns.(d): While geographic diversification is important, investing entirely in foreign markets can introduce currency risk and may not sufficiently protect against global market volatility.Relevant Law: No specific law mandates asset allocation, but guidelines from the Canadian Securities Administrators (CSA) emphasize diversification and risk management.

Correct Answer (a): Contributing the maximum amount early in the year allows more time for investments to grow tax-free. The earlier the contributions are made, the more potential for compound growth.Incorrect Answers:(b): While dollar-cost averaging can mitigate market timing risk, contributing the maximum amount early generally leads to greater growth over time.(c): Funds must be withdrawn from an RRSP and then contributed to a TFSA, potentially triggering tax implications on the withdrawal.(d): While TFSAs can hold high-risk investments, it’s important to balance risk and return. Over-concentration in high-risk assets can lead to significant losses.Relevant Law: Income Tax Act, section 146.2, which governs the rules for TFSAs.

Correct Answer (c): Delaying CPP benefits until age 70 results in a higher monthly benefit due to the CPP enhancement for delayed commencement. For each month after age 65 that benefits are delayed, the pension amount increases by 0.7%, resulting in a 42% increase at age 70.Incorrect Answers:(a): Starting benefits at age 60 results in a reduction of 0.6% per month before age 65, totaling a 36% reduction by age 60.(b): Starting benefits at age 65 provides the standard pension amount without the increase associated with delayed benefits.(d): Starting benefits immediately at any age other than 70 would not maximize the total lifetime benefits for someone expecting to live a long life.Relevant Law: Canada Pension Plan (CPP) Act, section 42(2), which details the adjustments for early or delayed receipt of benefits.

Correct Answer (b): Standard deviation measures the dispersion of returns around the mean, providing an overall sense of the volatility and risk of the entire portfolio. It captures the total risk, including both systematic and unsystematic risks.Incorrect Answers:(a): Beta coefficient measures only the systematic risk relative to the market, not the total risk.(c): Sharpe ratio assesses risk-adjusted return but does not provide a direct measure of risk.(d): Value at Risk (VaR) estimates the maximum potential loss over a specific time period with a given confidence level, but it does not capture the full risk profile.Relevant Law: While there are no specific Canadian laws dictating the use of these metrics, financial industry standards and practices endorsed by the Canadian Securities Administrators (CSA) often include these measures for risk assessment.

Correct Answer (c): Regular updates on the plan’s funding status help Mr. Edwards stay informed about the financial health of the pension plan, enabling him to take appropriate actions if necessary.Incorrect Answers:(a): Employee contributions typically do not affect the funding status of a DB plan as it is primarily the employer’s responsibility.(b): While diversification of personal investments is important, it does not address the potential underfunding issue within the pension plan itself.(d): Opting out of the pension plan may not be advisable if the DB plan offers guaranteed benefits that a personal retirement account cannot provide.Relevant Law: Pension Benefits Standards Act, 1985, which governs the regulation of federally regulated pension plans in Canada, including requirements for funding and reporting.

Correct Answer (c): The OAS pension is subject to a clawback (also known as the OAS Recovery Tax) if the recipient’s net income exceeds a specified threshold ($82,769 for 2024). For every dollar above this threshold, 15 cents is clawed back.Incorrect Answers:(a): The reduction is not dollar-for-dollar but rather 15 cents for every dollar of income over the threshold.(b): Employment income can affect the OAS pension through the clawback mechanism if it causes total income to exceed the threshold.(d): The OAS clawback threshold is not directly related to the CPP maximum pensionable earnings.Relevant Law: Old Age Security Act, section 19, which outlines the provisions for the Recovery Tax (clawback) based on net income.

Correct Answer (b): Retaining earnings within the corporation can benefit from lower corporate tax rates. Paying herself dividends allows for income splitting and can potentially be taxed at a lower rate than salary, depending on her total income.Incorrect Answers:(a): Paying a large salary increases personal income tax liability, and while it can maximize RRSP contributions, it may not be the most tax-efficient strategy overall.(c): Borrowing funds from the corporation without declaring it as income is not allowed and can result in tax penalties.(d): While interest on loans for investment purposes can be deductible, it does not directly reduce or defer taxes in the same way as using corporate income and dividends.Relevant Law: Income Tax Act, sections 82 and 121 (dividends), and section 15(2) (loans to shareholders).

Correct Answer (a): Maximizing RRSP contributions is beneficial because it offers tax-deferred growth, reducing current taxable income through deductions, and allows investments to grow tax-free until withdrawal.Incorrect Answers:(b): Non-registered accounts do not offer tax-deferred growth, leading to potentially higher taxes on investment income.(c): Withdrawing early from an RRSP can incur taxes and penalties, reducing the overall amount available for retirement.(d): Ignoring tax considerations can lead to inefficient use of investment vehicles and higher overall taxes, reducing net retirement savings.Relevant Law: Income Tax Act, section 146, which governs the rules for RRSPs, including contributions and withdrawals.

Correct Answer (b): The RRSP over-contribution limit allows a cumulative lifetime excess of up to $2,000 without penalty. However, amounts exceeding this limit are subject to a penalty tax of 1% per month on the excess amount.Incorrect Answers:(a): There are penalties for over-contributing if the excess is not within the allowable $2,000 buffer.(c): The penalty is 1% per month on the excess amount, not 10%.(d): While reporting over-contributions is important, the key consideration is the penalty tax on excess amounts beyond the $2,000 allowance.Relevant Law: Income Tax Act, section 204.1, which outlines the penalties for RRSP over-contributions.

Correct Answer (b): Interest income is fully taxable at the individual’s marginal tax rate. Dividends from Canadian corporations benefit from a dividend tax credit, which reduces the effective tax rate. Only 50% of capital gains are included in taxable income, making them more tax-efficient than interest income.Incorrect Answers:(a): Interest and dividends are not taxed at the same rate; capital gains are not tax-free.(c): Different types of investment income are taxed differently, not uniformly at the marginal rate.(d): Capital gains are not taxed at the highest rate; only 50% are taxable.Relevant Law: Income Tax Act, section 82 (dividends), section 3(b) (capital gains), and section 12 (interest income).

Correct Answer (c): Diversifying the portfolio reduces the risk associated with overexposure to a single sector. This strategy spreads risk across various sectors, reducing the impact of a downturn in any one area.Incorrect Answers:(a): Selling all assets in the sector might be too drastic and could lead to missed opportunities; diversification is a more balanced approach.(b): Increasing investment in the sector further concentrates risk rather than reducing it.(d): Hedging can mitigate some risk but does not address the fundamental issue of overexposure; diversification is more comprehensive.Relevant Law: Principles of portfolio management and diversification are recommended by guidelines from the Canadian Securities Administrators (CSA).

Correct Answer (c): CPP benefits are determined by your average earnings during your working years, adjusted for inflation, and the number of years you have made contributions. The CPP uses the highest-earning years to calculate the pension amount.Incorrect Answers:(a): CPP contributions are mandatory for most workers aged 18 to 70 who earn more than the minimum amount.(b): There is no requirement to have made contributions for 20 years; the benefit amount depends on the years of contribution and earnings.(d): CPP contributions are based on a percentage of earnings up to the annual maximum pensionable earnings, not a flat 10%.Relevant Law: Canada Pension Plan Act, sections detailing contributions (section 10) and benefits calculations (section 46).

Correct Answer (c): The RRSP over-contribution limit allows a cumulative lifetime excess of up to $2,000 without penalty. Any amount exceeding this limit is subject to a penalty tax of 1% per month on the excess amount.Incorrect Answers:(a): There are penalties for over-contributing if the excess is not within the allowable $2,000 buffer.(b): The allowable over-contribution without penalty is $2,000, not $5,000.(d): The penalty is 1% per month on the excess amount, not 10%.Relevant Law: Income Tax Act, section 204.1, which outlines the penalties for RRSP over-contributions.

Correct Answer (b): Over-contributions to a TFSA are subject to a penalty tax of 1% per month on the excess amount until it is withdrawn. This rule is intended to discourage over-contributions and ensure compliance with annual contribution limits.Incorrect Answers:(a): There are penalties even if the excess contribution is withdrawn within the same year.(c): The penalty is not a one-time 10% fee; it is a 1% monthly charge.(d): The penalty rate is 1% per month, not 5%.Relevant Law: Income Tax Act, section 207.02, which covers penalties for over-contributions to TFSAs.

Correct Answer (c): The OAS pension is subject to a clawback (OAS Recovery Tax) if the recipient’s net income exceeds a specified threshold ($86,912 for 2024). For every dollar above this threshold, 15 cents is clawed back.Incorrect Answers:(a): The reduction is not dollar-for-dollar but rather 15 cents for every dollar of income over the threshold.(b): Employment income can affect the OAS pension through the clawback mechanism if it causes total income to exceed the threshold.(d): OAS pension benefits do not increase with higher employment income; they may decrease due to the clawback.Relevant Law: Old Age Security Act, section 19, which outlines the provisions for the Recovery Tax (clawback) based on net income.

Correct Answer (b): Investments held within a TFSA grow tax-free, and withdrawals are also tax-free, making it an excellent vehicle for minimizing taxes on investment income.Incorrect Answers:(a): Interest income from high-yield bonds is fully taxable, which does not minimize taxes.(c): Non-registered accounts do not offer the same tax advantages as registered accounts like TFSAs.(d): While foreign tax credits can mitigate some taxes, they are not as effective as the tax-free growth and withdrawals provided by a TFSA.Relevant Law: Income Tax Act, section 146.2, which outlines the rules and benefits of TFSAs.

Correct Answer (b): Starting CPP benefits early results in a reduction of approximately 7.2% per year for each year before age 65. If David starts receiving benefits at age 60, his benefits will be reduced by approximately 36%.Incorrect Answers:(a): Early retirement leads to a reduction in benefits, not the full amount.(c): Benefits are reduced, not increased, for early retirement.(d): CPP benefits can start as early as age 60, with reductions for each year before 65.Relevant Law: Canada Pension Plan Act, section 46, which outlines the early retirement reduction factors.

Correct Answer (b): Establishing a trust allows Mr. Thompson to manage and distribute his assets efficiently, providing control over how his wealth is preserved and transferred to future generations. Trusts can also offer tax advantages and protect assets from creditors.Incorrect Answers:(a): High-growth stocks can be volatile and risky, which may not align with wealth preservation goals.(c): Holding all assets in cash avoids market risks but does not protect against inflation, which can erode wealth over time.(d): Life insurance can be part of a wealth preservation strategy, but relying solely on it does not provide the comprehensive benefits of a trust.Relevant Law: Trust and Estate law, as governed by provincial legislation, and the Income Tax Act, sections related to the taxation of trusts and estates.

Correct Answer (d): All these benefits are generally considered taxable:(a): The company car is a taxable benefit, and its value is added to Sarah’s income.(b): The fitness membership, unless it meets certain specific conditions, is typically a taxable benefit.(c): An educational scholarship for Sarah’s children provided by her employer is usually considered a taxable benefit.Relevant Law: Income Tax Act, sections 6(1)(a) for employment benefits, and specific guidelines from the Canada Revenue Agency (CRA) regarding taxable benefits.

Correct Answer (b): Real estate property is not a qualified investment for an RRSP. Direct investment in real estate is prohibited within RRSPs.Incorrect Answers:(a): Individual stocks listed on a major stock exchange are allowed.(c): Mutual funds are allowed investments within an RRSP.(d): GICs are also permitted within an RRSP.Relevant Law: Income Tax Act, section 146, which governs RRSPs and specifies qualified investments.

Correct Answer (b): Donating publicly traded securities directly to a charity can maximize tax benefits because the donor can avoid capital gains tax on the appreciated value of the securities, and also receive a charitable donation tax credit for the fair market value of the securities.Incorrect Answers:(a): While cash donations are tax-deductible, they do not provide the additional benefit of avoiding capital gains tax.(c): Donations of personal property may not be as tax-efficient, especially if the property has appreciated significantly in value.(d): Volunteering time is valuable, but it does not provide a tax deduction.Relevant Law: Income Tax Act, section 118.1, which covers charitable donations and the associated tax credits and deductions.

Correct Answer (c): Standard deviation measures the volatility of an asset’s returns, indicating how much an asset’s returns can deviate from its average return. It is widely used to quantify the risk of individual assets.Incorrect Answers:(a): Beta measures an asset’s sensitivity to market movements, not its standalone risk.(b): Sharpe ratio measures risk-adjusted return, not the risk itself.(d): Alpha measures an asset’s performance relative to a benchmark, not its standalone risk.Relevant Law: While not a legal requirement, the use of standard deviation in risk assessment is a standard practice in financial planning and portfolio management.

Correct Answer (b): In a Defined Benefit pension plan, retiring early typically results in a reduction of pension benefits. This reduction is often calculated based on the number of years before the normal retirement age that the employee retires, to account for the longer payout period and fewer years of contributions.Incorrect Answers:(a): Early retirees generally receive reduced benefits, not the full amount.(c): She will still receive benefits, but at a reduced rate.(d): Benefits are reduced, not increased, for early retirement.Relevant Law: Pension Benefits Standards Act, 1985, and related provincial legislation that governs the terms and conditions of Defined Benefit pension plans.

Correct Answer (c): Investment income in a TFSA grows tax-free, and withdrawals are also tax-free. Contributions to an RRSP are tax-deductible, but withdrawals from an RRSP are fully taxable as income.Incorrect Answers:(a): Withdrawals from a TFSA are tax-free, and contributions to an RRSP are tax-deductible.(b): Withdrawals from an RRSP are taxable, not tax-free, and investment income in a non-registered account is taxable annually, not tax-deferred.(d): Contributions to a TFSA are not tax-deductible, and while investment income in an RRSP grows tax-deferred, it is not tax-free.Relevant Law: Income Tax Act, section 146 (RRSPs) and section 146.2 (TFSAs), which outline the tax treatments of these accounts.

Correct Answer (b): Regularly reviewing and adjusting the retirement plan is crucial to ensure it remains aligned with changing financial situations, goals, and market conditions. This proactive approach helps to maintain an appropriate asset allocation and risk level.Incorrect Answers:(a): Allocating all investments to high-growth stocks increases risk and is not suitable for retirement planning.(c): Continuing contributions to the RRSP is important for tax-advantaged growth.(d): Relying solely on an employer-sponsored pension plan is risky; a diversified approach is better.Relevant Law: Income Tax Act, section 146 (RRSPs), and general financial planning principles.

Correct Answer (b): The Home Buyers’ Plan (HBP) allows first-time home buyers to withdraw up to $35,000 from their RRSP without immediate tax consequences. The withdrawn amount must be repaid over 15 years.Incorrect Answers:(a): The Lifelong Learning Plan (LLP) is for education purposes, not home purchases, and the limit is different.(c): The First-Time Home Buyer Incentive is a different program and does not involve RRSP withdrawals.(d): There is no RRSP Loan Program with a $50,000 limit for home purchases.Relevant Law: Income Tax Act, section 146.01, which outlines the rules for the Home Buyers’ Plan (HBP).

Correct Answer (b): Hiring a family member and paying them a reasonable salary for actual work performed is a legitimate income-splitting strategy. The salary must reflect the market value for the work done.Incorrect Answers:(a): Shifting income to a minor child is not allowed under Canadian tax laws due to attribution rules.(c): Transferring all income to a spouse without reporting it is illegal and constitutes tax evasion.(d): Contributions to a spouse’s RRSP cannot be immediately withdrawn without tax consequences and are subject to spousal RRSP withdrawal rules.Relevant Law: Income Tax Act, section 74.1 (attribution rules) and section 67 (reasonableness of expenses, including salaries).