Canadian securities exam -WME Course For Financial Planners (WME-FP) – Quiz-07

C) Power of Attorney for Personal Care: This document allows Rachel to appoint a trusted individual to make medical decisions on her behalf if she becomes incapacitated.A) Living trust: A living trust is used to manage and distribute assets and does not cover health care decisions.B) Last will and testament: A will specifies how a person’s assets are to be distributed after death and does not address medical decisions.D) Joint tenancy agreement: Joint tenancy relates to property ownership and does not address health care decisions.Relevant Rule: Powers of Attorney for Personal Care are governed by provincial legislation such as the Substitute Decisions Act, 1992 in Ontario, ensuring that individuals can designate someone to make health care decisions if they become incapable.

C) Dividends from Canadian corporations: Dividends from Canadian corporations benefit from the dividend tax credit, reducing the effective tax rate on this type of income.A) Interest income: Interest income is fully taxable at an individual’s marginal tax rate without any preferential treatment.B) Capital gains: Capital gains are taxed at a lower rate than interest income, as only 50% of the capital gain is included in taxable income, but they do not receive the dividend tax credit.D) Foreign dividends: Foreign dividends are fully taxable without the benefit of the dividend tax credit, although foreign tax credits may apply to mitigate double taxation.Relevant Rule: The taxation of dividends from Canadian corporations is governed by the Income Tax Act (Canada), which provides a dividend tax credit to avoid double taxation at the corporate and individual levels.

A) Age 60, with a permanent reduction of 0.6% per month before age 65: Individuals can start receiving CPP retirement benefits as early as age 60, but the pension amount is reduced by 0.6% for each month before the standard age of 65.B) Age 55, with a permanent reduction of 0.7% per month before age 60: This is incorrect because CPP benefits cannot be started at age 55.C) Age 62, with a permanent reduction of 0.4% per month before age 67: This is incorrect as the reduction is 0.6% per month and the standard age is 65, not 67.D) Age 65, with no reduction as it is the standard age: While benefits can start at age 65 without reduction, this does not address the option to start at a younger age with a reduced amount.Relevant Rule: The Canada Pension Plan (CPP) allows individuals to start receiving reduced retirement benefits as early as age 60, with a reduction rate of 0.6% per month before age 65, as stipulated in the Canada Pension Plan Act.

B) To validate the will and authorize the executor: Probate is a legal process that validates the will and formally authorizes the executor to manage and distribute the estate.A) To minimize estate taxes: Probate itself does not minimize estate taxes; it is a procedural step in estate administration.C) To transfer property to beneficiaries without legal oversight: Probate involves legal oversight to ensure proper transfer of property and compliance with the will’s terms.D) To ensure privacy of the deceased’s financial affairs: Probate is a public process, so it does not ensure privacy of the deceased’s financial affairs.Relevant Rule: The probate process is governed by provincial legislation such as the Estates Administration Act and various Probate Acts, which outline the legal framework for validating wills and authorizing executors.

B) Inflation rate: The inflation rate is critical in estimating future income needs because it affects the cost of living and purchasing power over time. An accurate inflation rate estimate helps project the future value of money.A) Current net worth: While important for understanding the client’s financial position, net worth does not directly estimate future income needs.C) Client’s current salary: The current salary provides a baseline for income but must be adjusted for inflation to estimate future needs.D) Current debt levels: Current debt levels impact financial planning but are less critical than inflation for estimating future income needs.Relevant Rule: Considering the inflation rate is essential for accurate retirement income planning, as outlined in financial planning standards and guidelines provided by organizations such as the Financial Planning Standards Council (FPSC).

B) Employer-provided health care benefits: Health care benefits provided by the employer are generally non-taxable to the employee under Canadian tax law.A) Group term life insurance premiums paid by the employer: These premiums are considered a taxable benefit to the employee.C) Employer-paid membership fees for professional associations: These fees are typically considered a taxable benefit unless they are directly related to the employee’s job.D) Employer-provided automobile for personal use: The personal use of an employer-provided automobile is considered a taxable benefit.Relevant Rule: The taxation of employee benefits is governed by the Income Tax Act (Canada) and CRA guidelines, which specify which benefits are taxable and which are non-taxable.

C) Implementing an emergency fund: An emergency fund provides liquidity and financial stability during unforeseen events, mitigating the risk of significant financial loss.A) Investing in high-yield bonds: While potentially offering high returns, high-yield bonds carry higher risk and do not provide immediate liquidity.B) Maintaining a diversified investment portfolio: Diversification reduces investment risk but may not provide immediate funds in an emergency.D) Purchasing high-value real estate: Real estate can be a good long-term investment but is not easily liquidated in an emergency.Relevant Rule: Establishing an emergency fund is a key component of personal risk management and strategic wealth preservation, as outlined in financial planning guidelines and risk management principles.

B) Taxed at her current marginal tax rate plus withholding tax: Premature withdrawals from an RRSP are taxed at the individual’s current marginal tax rate and are also subject to withholding tax at the time of withdrawal.A) No tax consequences if withdrawn for education: Withdrawals under the Lifelong Learning Plan (LLP) are temporarily tax-free if used for education, but this is a specific program and not a general rule.C) No penalties for withdrawals before age 65: Withdrawals from an RRSP before retirement are taxed, regardless of the age, with certain exceptions.D) Tax-free withdrawals up to $5,000 annually: There are no provisions for tax-free withdrawals up to $5,000 from an RRSP; all withdrawals are taxable unless specific conditions (e.g., LLP or Home Buyers’ Plan) are met.Relevant Rule: The taxation and withholding rules for RRSP withdrawals are outlined in the Income Tax Act (Canada), which stipulates the tax treatment of premature withdrawals.

C) Testamentary trust: This type of trust is created as part of a will and comes into effect upon the death of the testator, allowing Nancy to specify how the assets are managed and distributed after her death.A) Irrevocable trust: This trust is set up during the lifetime of the grantor and cannot be altered or revoked once established.B) Living (inter vivos) trust: This trust is established during the grantor’s lifetime and can be revocable or irrevocable but does not inherently specify post-death management unless detailed in the trust deed.D) Charitable remainder trust: This trust provides income to the grantor or other beneficiaries during their lifetimes, with the remainder going to a charitable organization after death; it is not primarily for family beneficiaries.Relevant Rule: Testamentary trusts are governed by the provisions of the Income Tax Act (Canada) and provincial trust laws, which outline their creation and tax treatment.

C) Rollover: A rollover allows the deferral of tax liability by reinvesting the proceeds from the sale of an investment into a similar investment, such as rolling over proceeds from a matured GIC into another GIC.A) Income splitting: This involves transferring income to a lower-income spouse or family member to reduce the overall tax burden but does not directly involve reinvestment.B) Tax-loss harvesting: This strategy involves selling investments at a loss to offset capital gains, reducing taxable income, but does not involve reinvesting in similar investments.D) Capital gains exemption: This refers to the exclusion of certain capital gains from taxable income, such as gains from the sale of a principal residence, and is not a reinvestment strategy.Relevant Rule: The concept of rollovers is addressed in the Income Tax Act (Canada), particularly in sections related to deferred plans and tax-deferred investments.

D) 40 years: To qualify for a full OAS pension, an individual must have lived in Canada for at least 40 years after turning 18.A) 10 years: This is the minimum residency requirement for a partial OAS pension, not the full pension.B) 20 years: Incorrect, as it does not meet the full pension requirement.C) 30 years: Also incorrect, as the full pension requires 40 years of residency.Relevant Rule: The Old Age Security Act outlines the eligibility criteria for OAS, including residency requirements to receive full and partial pensions.

C) Investment policy statement (IPS): The IPS outlines the investment objectives, risk tolerance, time horizon, and constraints, serving as a roadmap for the portfolio management process.A) Asset allocation: This step involves distributing investments across various asset classes but follows the establishment of objectives and constraints.B) Performance evaluation: This involves assessing the performance of the portfolio against benchmarks and objectives, which occurs after implementation.D) Security selection: This step involves choosing specific investments within the asset classes but is guided by the IPS.Relevant Rule: The IPS is a crucial document in the portfolio management process, and its importance is highlighted in investment management frameworks and guidelines provided by professional bodies such as the CFA Institute.

B) Standard deviation: Standard deviation measures the total risk of an investment by assessing the variability of returns around the mean. It includes both systematic (market) and unsystematic (specific) risk.A) Beta: Beta measures only systematic risk relative to the market, not total risk.C) Alpha: Alpha measures the excess return of an investment relative to its benchmark, not risk.D) Sharpe ratio: The Sharpe ratio assesses risk-adjusted returns, not the total risk itself.Relevant Rule: The use of standard deviation as a measure of total risk is a fundamental concept in modern portfolio theory, as outlined by the CFA Institute and other financial planning bodies.

B) Tax-efficient withdrawal sequence: This strategy involves withdrawing from taxable accounts first, allowing tax-advantaged accounts (like RRSPs) to continue growing tax-deferred, thereby minimizing taxes over the long term.A) Roth conversion ladder: This is a strategy primarily used in the U.S. to convert traditional retirement accounts to Roth accounts over time, not directly applicable to Canadian tax-advantaged accounts.C) Income splitting with a spouse: While useful for reducing tax liability, this is not a specific withdrawal sequence strategy.D) Gifting assets to children: Gifting can reduce the size of an estate but does not address the sequence of withdrawals from retirement accounts.Relevant Rule: Tax-efficient withdrawal strategies are part of comprehensive retirement planning and are recommended by financial planning standards to optimize after-tax retirement income.

C) Combining assets with low or negative correlations: MPT suggests that by combining assets with low or negative correlations, the overall portfolio risk can be minimized without sacrificing expected return.A) Selecting high-risk, high-reward investments: This increases the risk profile and is contrary to the risk-reduction aim of MPT.B) Investing equally in all available asset classes: This does not necessarily achieve optimal diversification as it ignores correlation.D) Maximizing the number of assets in the portfolio: Simply increasing the number of assets does not guarantee optimal diversification; the key is the correlation between the assets.Relevant Rule: Modern Portfolio Theory, developed by Harry Markowitz, is a cornerstone of investment management practices, emphasizing diversification based on the correlation of asset returns to reduce portfolio risk.

C) Fixed annuity: Provides a guaranteed fixed payment for life, ensuring stable income regardless of interest rate fluctuations or market conditions.A) Variable annuity: Payments can vary based on the performance of the underlying investments, thus not guaranteeing fixed payments.B) Indexed annuity: Payments are linked to an index, so they can fluctuate based on the index’s performance.D) Deferred annuity: Payments start at a future date, and can be either fixed or variable depending on the terms chosen.Relevant Rule: Annuities are governed by provincial insurance regulations and guidelines, which ensure that the terms of the annuity contract are adhered to, providing financial security to retirees.

C) Health care proxy: This document appoints someone to make healthcare decisions on Mr. Thompson’s behalf if he becomes incapacitated.A) Living will: Specifies Mr. Thompson’s healthcare wishes but does not appoint someone to make decisions.B) Durable power of attorney for finances: Grants authority to manage financial matters, not healthcare decisions.D) Testamentary trust: Manages assets after death, unrelated to healthcare decisions during incapacitation.Relevant Rule: Health care proxies and living wills are governed by provincial laws, such as the Health Care Consent Act in Ontario, which outline the legal framework for advance directives and substitute decision-making.

A) Robo-advisory services: These use algorithms to automate portfolio management and rebalancing, improving efficiency and consistency in investment management.B) Blockchain technology: Primarily used for secure transactions and record-keeping, but not directly for portfolio management.C) Crowdfunding platforms: Used for raising capital for projects or businesses, not for managing portfolios.D) Cryptocurrencies: Digital assets that can be part of a portfolio but do not inherently improve the efficiency of portfolio management.Relevant Rule: The integration of fintech in investment management is guided by regulatory bodies such as the Canadian Securities Administrators (CSA), which oversee the use of technology in financial services to ensure compliance and investor protection.

B) Income replacement ratio: This method estimates future retirement expenses by determining the percentage of pre-retirement income needed to maintain the current lifestyle and adjusting for inflation.A) Capital needs analysis: Focuses on the total capital required at retirement to generate the desired income.C) Monte Carlo simulation: Uses random sampling to model the probability of different outcomes in retirement planning.D) Asset-liability matching: Involves aligning assets with future liabilities, typically used in institutional portfolio management.Relevant Rule: The concept of income replacement ratio is commonly used in retirement planning standards, as outlined by the Financial Planning Standards Council (FPSC) in Canada, to ensure adequate retirement income.

C) Investment income earned within a TFSA is tax-free: All investment income (interest, dividends, capital gains) earned within a TFSA is tax-free.A) Contributions are tax-deductible: TFSA contributions are made with after-tax dollars and are not tax-deductible.B) Withdrawals are taxable as income: Withdrawals from a TFSA are tax-free.D) Unused contribution room cannot be carried forward: Unused TFSA contribution room can be carried forward indefinitely.Relevant Rule: The TFSA rules are governed by the Income Tax Act (Canada), which outlines the tax treatment of contributions, withdrawals, and investment income within the account.

B) They remain in the plan until retirement age: In a defined benefit plan, accrued benefits are usually preserved in the plan until the participant reaches retirement age. The benefits may be adjusted for early withdrawal if applicable.A) They are forfeited: Accrued benefits are typically vested and not forfeited when an employee leaves before retirement age.C) They are rolled into a Registered Retirement Savings Plan (RRSP) automatically: While employees may have the option to transfer the commuted value to an RRSP, it is not automatic.D) They are converted into an annuity: This is an option but not the default action upon leaving the company.Relevant Rule: Defined benefit pension plans are regulated by provincial and federal pension standards legislation, such as the Pension Benefits Standards Act (PBSA) in Canada, which outlines the preservation of accrued benefits and options for portability.

C) Credit risk: This is an unsystematic risk associated with the possibility that a borrower will default on a loan or bond. It can be mitigated through diversification by holding a variety of credit exposures.A) Interest rate risk: A systematic risk related to changes in interest rates affecting all investments; cannot be eliminated by diversification.B) Market risk: Also known as systematic risk, it affects the entire market and cannot be diversified away.D) Inflation risk: A systematic risk that affects the purchasing power of money and is inherent in the economy; it cannot be diversified away.Relevant Rule: Unsystematic risks, including credit risk, are discussed in the context of portfolio theory and risk management principles as outlined by financial planning standards and investment frameworks.

C) Interest income: This type of income is taxed at the individual’s full marginal tax rate, making it the highest taxed form of investment income.A) Capital gains: Only 50% of capital gains are included in taxable income, resulting in a lower effective tax rate.B) Dividends from Canadian corporations: Eligible for the dividend tax credit, which reduces the effective tax rate compared to interest income.D) Foreign dividends: Generally taxed at the full marginal tax rate, but tax treaties and foreign tax credits can reduce the overall tax burden, still usually higher than capital gains but can be lower than interest income depending on the circumstances.Relevant Rule: The taxation of different types of investment income is governed by the Income Tax Act (Canada), which outlines the specific rates and credits applicable.

A) Revocable living trust: This trust is created during the grantor’s lifetime and can be modified or revoked while the grantor is alive. Upon the grantor’s death, it becomes irrevocable and can help avoid probate.B) Testamentary trust: Created by a will and only comes into effect upon the grantor’s death, subject to probate.C) Inter vivos trust: Also created during the grantor’s lifetime but can be either revocable or irrevocable; it depends on the specific terms whether it avoids probate.D) Bare trust: A simple trust where the trustee holds the property for the beneficiary who has the absolute right to the trust’s income and capital, typically not used for probate avoidance.Relevant Rule: The use of trusts in estate planning, including revocable living trusts, is governed by provincial trust law and relevant sections of the Income Tax Act (Canada), which address the treatment and taxation of trusts.

C) What are your expected annual expenses during retirement?: This question helps to determine the amount of income needed to sustain Jane’s lifestyle in retirement and is critical for assessing whether her retirement income will be sufficient.A) How much do you currently have in savings?: While important, this information alone doesn’t provide a complete picture of income sustainability without understanding expenses.B) What is your expected rate of return on investments?: This helps in projecting the growth of her savings but is secondary to knowing the expenses.D) At what age do you plan to retire?: Important for timing but does not directly address income sustainability without considering expenses.Relevant Rule: Understanding and estimating retirement expenses is a fundamental aspect of retirement planning, as outlined in financial planning standards and guidelines, such as those provided by the Financial Planning Standards Council (FPSC) in Canada.

C) Indexed annuity: Payments are adjusted based on changes in the CPI, protecting the purchasing power of Lisa’s retirement income against inflation.A) Fixed annuity: Provides fixed payments that do not adjust for inflation.B) Variable annuity: Payments vary based on the performance of the underlying investments, not directly linked to CPI.D) Deferred annuity: Payments start at a future date but can be either fixed or indexed, depending on the specific terms chosen.Relevant Rule: Indexed annuities are designed to provide inflation protection, aligning with guidelines and principles for securing retirement income as recommended by financial planning bodies and insurance regulators.

D) Planning: The planning step involves creating an IPS, which documents the client’s investment objectives, risk tolerance, time horizon, and constraints. This serves as a blueprint for the entire investment process.A) Asset allocation: Involves distributing investments across various asset classes, guided by the IPS but not where the IPS is created.B) Security selection: Choosing individual securities within asset classes, based on the asset allocation strategy.C) Performance evaluation: Assessing the portfolio’s performance relative to benchmarks and objectives, based on criteria set out in the IPS.Relevant Rule: The creation of an IPS is a critical component of the portfolio management process, as outlined in standards and practices endorsed by the CFA Institute and financial planning organizations. The IPS helps ensure that the investment strategy aligns with the client’s goals and risk profile.

B) 0.6% per month: If Alex starts receiving CPP benefits at age 60, his benefits will be reduced by 0.6% for each month before age 65. This results in a total reduction of 36% (0.6% x 60 months).A) 0.5% per month: This was the reduction rate prior to 2012.C) 0.7% per month: This is incorrect for CPP but close to the correct value.D) 0.8% per month: This is not the correct reduction rate.Relevant Rule: According to the Canada Pension Plan Act, the reduction rate for taking CPP benefits early (before 65) is 0.6% per month for each month taken before age 65, which became effective from 2012 onwards.

B) Asset allocation: This strategy involves spreading investments across various asset classes (e.g., stocks, bonds, real estate) to minimize risk and enhance returns by balancing the risk and reward.A) Hedging: Involves using financial instruments like options or futures to offset potential losses.C) Dollar-cost averaging: Involves regularly investing a fixed amount of money into a particular investment regardless of its price.D) Tax-loss harvesting: Selling securities at a loss to offset capital gains for tax purposes.Relevant Rule: Asset allocation is a foundational principle in modern portfolio theory and is emphasized in guidelines from financial planning bodies like the CFA Institute and the Financial Planning Standards Council (FPSC).

C) $29,000: For the current year, the maximum RRSP contribution limit is the lesser of 18% of the previous year’s earned income or the dollar limit set by the Canada Revenue Agency (CRA). For 2023, the dollar limit is $29,210. Since 18% of Michael’s earned income ($100,000) is $18,000, he is allowed to contribute up to the dollar limit of $29,000.A) $18,000: This represents 18% of his earned income but is below the CRA’s dollar limit.B) $27,000: This amount is below the actual CRA limit for 2023.D) $18,500: This is not the correct maximum limit for the year 2023.Relevant Rule: The RRSP contribution rules are defined under the Income Tax Act (Canada), which specifies the annual contribution limits based on earned income and the set dollar limit by the CRA, which for 2023 is $29,210.