Canadian securities exam -WME Course For Financial Planners (WME-FP) – Quiz-05

Correct Answer (d): Evaluating risk tolerance involves considering multiple factors, including demographic information (such as age, income, and marital status), investment knowledge and experience, emotional temperament, and financial goals. All these factors collectively determine an individual’s comfort level with risk.Incorrect Answers:(a): While demographic factors like age and income are important, they are not the sole determinants of risk tolerance.(b): Investment knowledge and experience are significant but do not fully capture an individual’s risk tolerance.(c): Emotional temperament and financial goals are essential aspects of risk tolerance assessment, but they are not the only factors to consider.Relevant Law: There are no specific laws governing risk tolerance assessment, but it is a fundamental concept in financial planning.

Correct Answer (a): Establishing a trust and gifting assets during his lifetime can help James minimize estate taxes by utilizing exemptions and reducing the size of his taxable estate. Trusts offer flexibility and control over asset distribution, ensuring efficient wealth transfer.Incorrect Answers:(b): A simple will may not adequately address estate tax minimization and efficient wealth transfer, especially for larger estates.(c): Naming multiple beneficiaries on financial accounts does not provide the same level of control and tax planning as a trust.(d): Holding assets in joint tenancy may simplify asset transfer but does not offer the same level of control and tax planning as a trust.Relevant Law: Estate planning involves various legal principles and instruments, including trusts, wills, and tax laws governing estate taxes.

Correct Answer (c): The standard age for receiving full benefits from both CPP and OAS is 65. However, individuals can choose to start receiving CPP as early as age 60 with reduced benefits or delay until age 70 for increased benefits.Incorrect Answers:(a): The standard age for OAS is 65, not 60.(b): The standard age for CPP is 65, not 60.(d): While individuals can delay CPP and OAS benefits until age 70 for increased amounts, the standard age for full benefits is 65.Relevant Law: Canada Pension Plan Act and Old Age Security Act, which outline the eligibility criteria and benefit amounts for CPP and OAS.

Correct Answer (c): Self-employed individuals can reduce their taxable income by maximizing deductions for eligible business expenses, such as office rent, supplies, and professional fees.Incorrect Answers:(a): While contributing to a TFSA is a good strategy for tax-free growth, it does not reduce taxable income.(b): Investing in high-risk, high-return stocks may not be suitable for tax reduction purposes and could increase overall risk.(d): Transferring income to a minor child may trigger attribution rules and is not a legitimate tax reduction strategy.Relevant Law: Income Tax Act, which outlines eligible deductions for self-employed individuals.

Correct Answer (d): Expenses for a daily commute to work are considered personal expenses and are not eligible for deduction on a personal income tax return.Incorrect Answers:(a): Charitable donations are generally tax-deductible, subject to certain limits and conditions.(b): Union dues paid for employment-related purposes are eligible for deduction.(c): Membership fees for a professional association related to one’s job are generally tax-deductible.Relevant Law: Income Tax Act, which specifies eligible deductions for personal income tax returns.

Correct Answer (b): Allocating equally to stocks, bonds, and REITs provides a diversified portfolio across different asset classes, reducing overall risk.Incorrect Answers:(a): A 100% allocation to stocks of technology companies is highly concentrated and increases risk.(c): A 100% allocation to government bonds may reduce risk but lacks diversification across different asset classes.(d): A 100% allocation to a single real estate property is highly concentrated and increases risk.Relevant Law: While not a legal requirement, diversification is a fundamental principle of strategic wealth management and investment.

Systematic risk, also known as market risk, is inherent to the entire market or market segment and cannot be eliminated through diversification. Examples include interest rate changes, inflation, recessions, and political instability. In contrast, option (a) describes unsystematic risk, which can be mitigated through diversification. Option (c) pertains to management risk, and option (d) refers to currency risk, both of which are more specific and can typically be managed or mitigated with appropriate strategies.

Married couples with pre-retirement children often have the highest need for life insurance coverage because they typically have significant financial responsibilities, including mortgage payments, children’s education, and maintaining the family’s standard of living. In contrast, single young adults (option a) and retired couples without dependent children (option c) generally have fewer dependents and financial obligations. Middle-aged individuals with grown children (option d) may also see a reduced need for life insurance as their children become financially independent.

For Mr. Smith, the primary concern in the context of his high net worth and investment properties would be to secure property and casualty insurance. This coverage would protect against risks such as damage to his properties, liability claims from tenants, and loss of rental income, which are critical to maintaining his wealth. While diversifying his investment portfolio (option a) is important, it does not directly address the specific risks associated with his properties. Health insurance (option b) is also essential but not the immediate priority for his real estate investments. Setting up a charitable trust (option d) is more relevant for estate planning and philanthropic goals rather than immediate risk management.

B) Value at Risk (VaR): VaR measures the potential loss in value of a portfolio over a defined period for a given confidence interval. It is widely used to quantify the level of financial risk within a firm or investment portfolio over a specific time frame. VaR answers the question: “What is my worst-case scenario, and how much could I lose with X% confidence over a given period?”A) Standard Deviation: While standard deviation measures the dispersion of returns around the mean, it does not directly provide a measure of potential loss over a specific period.C) Beta Coefficient: Beta measures the volatility or systemic risk of a stock in comparison to the market as a whole. It is not a direct measure of potential downside risk.D) Sharpe Ratio: The Sharpe Ratio measures risk-adjusted return, not potential downside risk.Relevant Rule: Under the Canadian Securities Administrators (CSA) regulations, financial planners are required to assess and disclose the risks associated with their clients’ investment portfolios.

C) Dividends from Canadian Corporations: Dividends from Canadian corporations benefit from the dividend tax credit, which reduces the amount of tax payable on these dividends. This makes them more tax-efficient compared to other forms of investment income.A) Interest Income: Interest income is taxed at the individual’s marginal tax rate, which is typically higher than the rate for capital gains or eligible dividends.B) Capital Gains: Capital gains are taxed at 50% of the individual’s marginal tax rate, which is favorable but generally not as favorable as the treatment for dividends from Canadian corporations.D) Dividends from Foreign Corporations: Dividends from foreign corporations do not benefit from the Canadian dividend tax credit and are fully taxable at the individual’s marginal tax rate.Relevant Rule: As per the Income Tax Act (Canada), the taxation of investment income varies, and favorable tax treatment is given to dividends from Canadian corporations through the dividend tax credit.

B) Taxed at her marginal tax rate in the year of withdrawal: Withdrawals from an RRSP are fully taxable as income in the year of withdrawal, and the amount will be added to Sarah’s income for that year, subject to her marginal tax rate.A) No tax implications if the amount is repaid within 10 years: This statement is incorrect. While there are programs like the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP) that allow for tax-free withdrawals under certain conditions, standard RRSP withdrawals are taxed.C) Subject to a flat withholding tax of 30%: While there is withholding tax on RRSP withdrawals, the amount depends on the withdrawal amount and the province of residence, not a flat 30%. Additionally, the withholding tax is not the final tax; the withdrawal is still included in taxable income.D) Tax-free withdrawal under the Lifelong Learning Plan (LLP): The LLP allows for tax-free withdrawals from an RRSP to finance full-time training or education for the plan holder or their spouse, not their child. Therefore, this option is incorrect for funding a child’s education.Relevant Rule: According to the Canada Revenue Agency (CRA), all RRSP withdrawals are subject to income tax and must be included in the individual’s income for the year of the withdrawal.0

B) Diversify into more liquid assets like stocks and mutual funds: This strategy would reduce the liquidity risk by ensuring that a portion of the portfolio can be easily converted to cash if needed, providing Emma with better access to funds in case of an emergency or sudden financial need.A) Increase exposure to high-yield bonds: While this might increase income, high-yield bonds can also be illiquid and add to the overall risk.C) Invest in leveraged exchange-traded funds (ETFs): Leveraged ETFs can be very volatile and are generally not suitable for reducing risk, especially liquidity risk.D) Maintain the current asset allocation but insure the real estate properties: While insurance can protect against certain risks, it does not address the liquidity risk associated with having a large proportion of illiquid assets.Relevant Rule: The Canadian Securities Administrators (CSA) guidelines emphasize the importance of liquidity in a client’s portfolio, especially in relation to their net worth and financial goals.

D) Employer-paid tuition for a course related to her job: This benefit is non-taxable if the course is related to the employee’s current job or required for employment. This provision helps in employee development without the burden of additional taxes.A) Employer-provided vehicle for personal use: This is a taxable benefit, as it provides a personal advantage to the employee.B) Group term life insurance premiums paid by the employer: These premiums are considered a taxable benefit and must be included in the employee’s income.C) Reimbursement for professional membership fees: This can be a taxable benefit unless the membership is directly related to the employee’s duties.Relevant Rule: According to the Income Tax Act (Canada), certain employee benefits are specifically categorized as taxable or non-taxable. Employer-paid tuition for job-related courses is non-taxable under CRA guidelines.

B) $27,230 or 18% of earned income, whichever is less: For the 2023 tax year, the maximum RRSP contribution limit is the lesser of $27,230 or 18% of the previous year’s earned income, minus any pension adjustments and unused contribution room from previous years.A) $27,830 or 18% of earned income, whichever is less: This figure is incorrect for the 2023 tax year. The correct limit is $27,230.C) 18% of his previous year’s earned income without a dollar limit: There is a dollar limit ($27,230 for 2023).D) There is no contribution limit as long as he has the available contribution room: While it’s important to have available contribution room, there is still an annual limit that must be adhered to.Relevant Rule: According to the Income Tax Act (Canada) and guidelines from the Canada Revenue Agency (CRA), the annual contribution limit for RRSPs is set annually and must be followed to avoid penalties.

C) Family with Young Children: Emphasize debt reduction and saving for education: Emily and Robert are in the stage where they have young children and are likely dealing with significant financial responsibilities, including mortgage payments and future education costs. Prioritizing debt reduction and setting up savings plans for education (e.g., RESPs) is crucial.A) Empty Nest: Prioritize investment in high-risk, high-return assets: This stage typically occurs after children have left home, and higher-risk investments might be more appropriate for younger individuals without dependent responsibilities.B) Retirement: Focus on wealth preservation and minimal risk exposure: This stage involves preserving wealth and ensuring a stable income stream, which doesn’t apply to Emily and Robert’s current situation.D) Single Parent: Maximize contributions to retirement accounts: While important, this does not match Emily and Robert’s family structure or their immediate financial priorities.Relevant Rule: Financial planners must consider the client’s stage in the family life cycle to provide appropriate financial strategies as per the Financial Planning Standards Council (FPSC) guidelines.

C) Personal health insurance premiums: Personal health insurance premiums are not deductible as business expenses under Canadian tax law. They are considered personal expenses.A) Office rent: Office rent is a deductible business expense as it is directly related to the cost of operating the business.B) Meals and entertainment: Meals and entertainment are deductible but usually only up to 50% of the expense, as per CRA rules.D) Professional fees: Professional fees related to the business (e.g., accounting, legal services) are deductible as they are necessary for running the business.Relevant Rule: According to the Income Tax Act (Canada), certain expenses can be deducted to reduce taxable business income, but personal expenses, such as health insurance premiums, are not deductible.

B) Her benefits will increase by 42%: If Sophie delays taking her QPP benefits until age 70, her monthly benefits will increase by 0.7% for each month after age 65 that she delays, up to a maximum increase of 42% at age 70.A) Her benefits will decrease by 36%: This would apply if she took her benefits early at age 60, resulting in a reduction of 0.6% for each month before age 65.C) There will be no change in her benefits: This would apply if she took her benefits exactly at age 65.D) Her benefits will increase by 24%: This would be incorrect as the increase is calculated at 0.7% per month for each month after 65 up to age 70.Relevant Rule: The Quebec Pension Plan (QPP) adjusts benefits based on the age at which the individual starts to receive them, as per Retraite Québec regulations. Delaying benefits past 65 increases the monthly amount by 0.7% per month, up to a maximum of 42% at age 70.

B) $88,000: The total contribution room is the sum of annual limits since the TFSA’s introduction in 2009. The limits were: $5,000 (2009-2012), $5,500 (2013-2014), $10,000 (2015), $5,500 (2016-2018), and $6,000 (2019-2023). This adds up to $88,000.A) $63,500: This amount would be incorrect based on the historical contribution limits.C) $81,500: This is incorrect because it does not account for the total of all the annual limits.D) $77,000: This amount is also incorrect based on the annual contribution limits since 2009.Relevant Rule: According to the Canada Revenue Agency (CRA), the TFSA annual contribution limits must be adhered to avoid penalties, and unused contribution room accumulates each year.

A) 3.23% of the RRIF value at the beginning of the year: The minimum RRIF withdrawal percentage for a 60-year-old is 3.23%.B) 4.00% of the RRIF value at the beginning of the year: This percentage is applicable for individuals aged 65.C) 5.28% of the RRIF value at the beginning of the year: This percentage is applicable for individuals aged 71.D) 7.38% of the RRIF value at the beginning of the year: This percentage is applicable for individuals aged 78.Relevant Rule: According to the Income Tax Act (Canada), the minimum annual withdrawal from a RRIF is based on the age of the account holder and is calculated using specific percentages.

B) The contributions made by her and her employer, and the investment performance: In a Defined Contribution (DC) pension plan, the retirement benefits are based on the total contributions made to the plan and the investment returns on those contributions. This determines the account balance at retirement.A) The length of time she has been with the company: While tenure can influence the total contributions made, it is not the primary factor determining the benefit amount.C) Her final average salary before retirement: This is typically used in Defined Benefit (DB) plans, not DC plans.D) The overall profitability of the company: Company profitability does not directly affect the retirement benefits in a DC plan, as the benefits depend on contributions and investment performance.Relevant Rule: Under the Pension Benefits Standards Act, DC pension plans provide retirement benefits based on contributions and investment returns, unlike DB plans which promise a specified benefit based on salary and years of service.

C) Reducing overall portfolio risk: Diversifying a portfolio by including more stable investments helps to spread risk across different asset classes, which can protect against significant losses in any one area and thus preserve wealth.A) Maximizing short-term gains: This is not the primary focus of wealth preservation, which aims more at long-term stability and security.B) Increasing portfolio liquidity: While diversification can affect liquidity, the primary goal here is to reduce risk.D) Minimizing tax liability: Diversification itself does not directly address tax liabilities, although it can have some tax benefits depending on the types of investments.Relevant Rule: The Canadian Securities Administrators (CSA) emphasize diversification as a key strategy for managing investment risk and preserving wealth over the long term.

B) Canadian dividends are eligible for a dividend tax credit, while foreign dividends are fully taxable: Dividends from Canadian corporations benefit from a dividend tax credit, which reduces the effective tax rate. In contrast, dividends from foreign corporations do not qualify for this credit and are fully taxable at the individual’s marginal tax rate.A) Both are taxed at the same rate as regular income: This is incorrect because Canadian dividends receive favorable tax treatment through the dividend tax credit.C) Foreign dividends are tax-exempt, while Canadian dividends are fully taxable: This is incorrect; foreign dividends are not tax-exempt.D) Both are tax-exempt if reinvested within 60 days: There is no such provision in Canadian tax law.Relevant Rule: According to the Income Tax Act (Canada), the dividend tax credit applies to eligible dividends from Canadian corporations, reducing the tax burden compared to foreign dividends, which are fully taxable.

B) She can contribute up to the total of her unused contribution room and the current year’s limit: Unused RRSP contribution room accumulates and can be used in any future year, allowing Isabella to contribute beyond the annual limit up to the total available room.A) She can only use the unused contribution room in the year she turns 65: This is incorrect; she can use the unused room at any time.C) Unused contribution room expires after 10 years: Unused contribution room does not expire; it carries forward indefinitely.D) She can carry forward unused contribution room but cannot exceed $20,000 in any given year: There is no such cap on contributions, provided she has sufficient contribution room.Relevant Rule: According to the Income Tax Act (Canada), individuals can carry forward unused RRSP contribution room indefinitely and use it in future years, allowing for contributions beyond the annual limit based on accumulated room.

C) Computing the portfolio’s Sharpe Ratio: The Sharpe Ratio measures the risk-adjusted return of the portfolio, which is particularly useful for assessing the overall risk and return trade-off of a diversified portfolio.A) Calculating the standard deviation of returns for each individual asset: This measures the risk of each asset separately, but does not account for the diversification effect within the portfolio.B) Using the Capital Asset Pricing Model (CAPM) to estimate the beta of each asset: Beta measures systematic risk relative to the market, but does not provide a comprehensive measure of total portfolio risk.D) Determining the weighted average duration of the bonds in the portfolio: This is specific to interest rate risk for the bond portion of the portfolio and does not measure the overall portfolio risk.Relevant Rule: The Sharpe Ratio, as per modern portfolio theory, is a widely accepted measure for evaluating the risk-adjusted performance of an investment portfolio.

A) $7,000: Since Alex’s marginal tax rate is 30%, 30% of his $10,000 bonus will be withheld for taxes. This amounts to $3,000 ($10,000 x 0.30), leaving him with a net amount of $7,000 ($10,000 – $3,000).B) $3,000: This represents the tax amount, not the net amount received.C) $10,000: This would be the gross bonus amount before taxes are deducted.D) $8,500: This is incorrect based on the 30% tax rate applied to the bonus.Relevant Rule: According to the Income Tax Act (Canada), employment income, including bonuses, is subject to withholding tax based on the individual’s marginal tax rate.

D) $81,761; 15% of income above the threshold: For the 2023 tax year, the OAS clawback (officially known as the OAS Recovery Tax) begins when net income exceeds $81,761. The clawback rate is 15% of the income above this threshold.A) $56,000; 15% of income above the threshold: This is incorrect as the threshold is higher.B) $79,845; 15% of income above the threshold: This amount is incorrect for the 2023 tax year.C) $94,625; 20% of income above the threshold: This is incorrect as the threshold and the rate are wrong.Relevant Rule: According to Service Canada, the OAS clawback begins at a specific income threshold ($81,761 for 2023) and is calculated at a rate of 15% of the income above this threshold.

B) Contributing the maximum allowable amount to a Tax-Free Savings Account (TFSA): Contributions to a TFSA allow investment income, including interest, dividends, and capital gains, to grow tax-free. Withdrawals from a TFSA are also tax-free, making it an effective strategy for reducing overall tax liability.A) Investing in foreign dividend-paying stocks: Foreign dividends are fully taxable in Canada and do not benefit from the dividend tax credit available to Canadian dividends.C) Holding all investments in a non-registered account: Investment income in a non-registered account is fully taxable, which does not minimize tax liability.D) Reinvesting dividends into the same stocks: While reinvesting dividends can be a good investment strategy, it does not minimize the tax on dividends.Relevant Rule: According to the Income Tax Act (Canada), the TFSA allows Canadians to earn investment income tax-free, making it a powerful tool for tax reduction.

B) The withdrawal is subject to withholding tax and must be included in his taxable income for the year: RRSP withdrawals are subject to a withholding tax at the time of withdrawal, and the amount withdrawn must be included in the individual’s taxable income for the year, potentially increasing their overall tax liability.A) The withdrawal is tax-free if used for home purchase: This applies only to the Home Buyers’ Plan (HBP), which has specific conditions and repayment requirements.C) The withdrawal is penalized by a 10% tax surcharge in addition to regular taxes: There is no additional tax surcharge; the main impact is the withholding tax and inclusion in taxable income.D) The withdrawal reduces his RRSP contribution room for future years: Withdrawals do not affect future contribution room but reduce the RRSP balance.Relevant Rule: According to the Income Tax Act (Canada), RRSP withdrawals are subject to withholding tax and must be included in the individual’s taxable income, with no penalty beyond regular income tax.

C) Her final salary and years of service with the company: In a Defined Benefit (DB) pension plan, the retirement benefits are typically calculated based on a formula that includes the employee’s final average salary and the number of years of service with the employer. This provides a predictable benefit amount upon retirement.A) The amount she has contributed to the plan: While contributions are important, the benefit amount in a DB plan is not directly tied to individual contributions.B) The investment performance of the plan’s assets: The employer bears the investment risk, and benefits are guaranteed based on the formula, not the investment performance.D) The total number of employees in the plan: This is irrelevant to the calculation of individual pension benefits.Relevant Rule: Under the Pension Benefits Standards Act (PBSA), DB plans provide specified retirement benefits based on a formula that considers salary and years of service, offering predictable income in retirement.