Financial Investment and Retirement Planning: Key Concepts and Tax Implications

What do segregated funds offer?

Opportunity to bypass probate and potential creditor protection.

Do stocks pay dividends?

Yes, stocks pay dividends; bonds do not.

What is credit risk?

The risk that borrowers will fail to repay a loan.

What is a mutual fund?

A fund that allows ease of switching from one fund to another.

What is a key difference between ETFs and mutual funds?

ETFs have no sales load, while mutual funds do.

What is a disadvantage of annuities?

Lack of flexibility and interest rate risk.

What is inflation risk?

Leaving money in a bank account.

How are capital gains and qualifying dividends taxed?

At a lower rate than interest.

What is a trailing commission?

Paid to the agent as long as the investor holds the fund.

What is the right of rescission?

An investor may cancel a segregated fund contract in writing typically within 2 days of purchase.

What is an index fund?

A fund with no active management style and stocks listed on the stock exchange.

Are deposits in a TFSA tax-deductible?

No, deposits in a TFSA are not tax-deductible.

What is default risk most prevalent in?

Mortgage funds.

When is Linda taxed on her equity segregated fund?

Only when she makes a withdrawal.

What is a target date fund?

A fund designed for retirement in a specific year.

How are returns from dividend segregated funds taxed?

Returns may be taxed lower than GICs.

What do payout annuities not permit?

Withdrawals, leading to loss of control of capital.

Who can purchase annuity funds?

Annuity funds cannot be purchased from an RRSP.

What is an impaired annuity?

Available to individuals with a shortened life expectancy due to poor health.

What is a prescribed annuity?

Provides a stable and predictable level of taxation.

What is an MVA?

A penalty calculated by the insurer on withdrawal from accumulation annuities.

What is a benefit of a prescribed annuity?

Helps manage taxes.

What is the tax implication of non-prescribed annuities?

They have a large amount of tax owing in the early years of payment.

Who qualifies for the pension income tax credit?

Individuals aged 65 and older receiving annuity income.

What is an advanced deferred life annuity (ALDA)?

A life annuity available to individuals with an RRSP or RRIF.

What happens if the policy person dies in relation to an annuity?

The beneficiary will receive a lump sum of cash.

What is a deferred annuity?

The entire payment received by the annuitant is taxed as income in the year it is received.

What is the death benefit in relation to an annuity?

The tax owing on the adjusted cost base (ACB).

What is the contribution limit for individuals without penalty?

An individual can contribute up to $2,000 more than their contribution limit.

What is the maximum amount above which contributions are not made?

The year's maximum pensionable earnings (YMPE).

Can you receive CPP while continuing to work?

Yes, it is possible to begin receiving the CPP retirement pension while continuing to work.

What happens when a DPSP member retires?

He can transfer funds to an RRSP or RRIF.

What is the basic grant for a registered education savings plan (RESP)?

You can earn a basic grant of $500 per year regardless of household income.

Are OAS and CPP taxable?

Yes, both OAS and CPP are taxable.

What is the increase rate for OAS?

0.6% per month for 24 months, totaling 14.4%.

What is required for a registered disability savings plan (RDSP)?

The plan beneficiary must be eligible for the disability tax credit.

Can OAS pension benefits be split between spouses?

No, OAS pension benefits cannot be split between spouses.

What is the age requirement to receive OAS?

Must be at least 65 and have lived in Canada for 10 years after age 18.

Who contributes to a non-contributory pension plan?

Only the employer contributes.

Who can contribute to an RESP?

Anyone can contribute to the Registered Education Savings Plan.

What happens to earnings above the YMPE?

They are not subject to CPP contributions.

What must be done regarding PRB contributions between ages 60 and 65?

It is mandatory to make contributions if work continues.

What does Fintrac require from agents?

Agents must keep records about clients and transactions for deposits of $10,000 or more.

What are non-registered accounts?

Investment accounts not registered with the government; no special tax shelter.

What is the taxation on interest income in non-registered accounts?

Taxed at full marginal rate.

How are dividends taxed in non-registered accounts?

Taxed with a dividend tax credit.

How are capital gains taxed in non-registered accounts?

50% of the gain is taxable.

Are there contribution limits for non-registered accounts?

No, there are no contribution limits.

Are there age limits for opening non-registered accounts?

No, anyone can open and hold one.

What are the withdrawal restrictions for non-registered accounts?

No restrictions; withdraw anytime without penalties.

What does a life annuity with no guarantee not require?

A beneficiary designation.

What is a characteristic of a segregated fund contract?

No medical underwriting is required.

What is a risk associated with segregated funds?

There is a higher degree of risk than with many other types of funds.

What tax credit may annuity income qualify for?

Pension income tax credit for individuals aged 65 and older.

What is the basic grant amount for an RESP?

$500 per year regardless of household income.

What is a mutual fund?

An investment program funded by shareholders that trades in diversified holdings and is professionally managed.

What is the additional contribution allowance for an RRSP without penalty?

An individual can contribute $2,000 more than their contribution limit without penalty.

What is a deferred profit sharing plan (DPSp)?

It guarantees a pension upon retirement. Employees can transfer fundsin teh plan to rrsp upon retirment

What are trailing commissions?

They are included in a fund's Management Expense Ratio (MER).

Why might Assuris protection be considered useless?

Because the market value is higher than the guarantee.

What is a correct feature of an RESP?

Basic grant of $500 regardless of income.

What happens to CPP contributions after stopping work?

Contributions can stop, but benefits can still be received.

What is the main reason for purchasing a prescribed annuity?

To manage taxes.

What type of GIC has increasing rates?

Escalating GIC.

What is true regarding trailing commissions?

They are paid to the agent while the investment is held.

What is the risk associated with purchasing an annuity?

Interest rate risk.

What is guaranteed with GICs?

Principal and interest are guaranteed.

What should you avoid if worried about longevity risks?

Do not purchase a segregated fund.

What type of risk is associated with macroeconomic or political factors?

Market risk.

What factors can reduce an individual's RRSP contribution limit?

Contributions to a DB pension plan and receiving a past-service pension adjustment (PSPA).

What is true about CPP benefits?

They are taxable and based on years of contributions.

What is an Advanced Deferred Life Annuity (ADLA)?

It delays income payments until a future date, allowing savings to grow.

What is a characteristic of market-linked GICs?

Returns are capped.

How is a deferred annuity taxed when purchased with RRSP funds?

The entire payment received is taxed as income in the year it is received.

What is the minimum requirement for RRIF withdrawals?

No withholding tax on the minimal withdrawal

Who can deduct premiums paid into a segregated fund contract?

An individual who contributed to an RRSP.

What describes the tax advantages of annuities?

Annuity income may qualify for the pension income tax credit for individuals aged 65 and older.

What is a prescribed annuity?

It pays the same amount of interest and investment capital in every payment.

What is a Market Value Adjustment (MVA)?

A penalty charged by the insurer on withdrawals from accumulation annuities.

Who is most exposed to credit risk?

An investor who owns a bond segregated fund.

What type of annuity does not require a beneficiary designation?

Life annuity with no guarantee.

What are unique advantages of stocks over bonds?

Potential to earn dividends and capital gains.

What type of risk is most prevalent in mortgage funds?

Default risk.

What is the effect of DBPP contributions on RRSP limits?

DBPP contributions result in a PA and reduce RRSP limit.

How does PSPA affect RRSP contribution room?

PSPA decreases RRSP contribution room.

How are DBPP benefits determined?

DBPP benefits are determined by a formula.

What factors influence DCPP members' pensions?

DCPP pensions depend on contributions made, duration of contributions, choice of investments, and investment performance.

Who is responsible for investment decisions in a DCPP?

DCPP members are responsible for their own investment decisions.