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Jasmine purchases a 1-year, $10,000 face value strip bond for $9,600. At maturity, when Jasmine receives $10,000, which of the following statements is CORRECT?
A. Jasmine realizes a capital dividend of S400.
B. Jasmine realizes a taxable dividend of $400.
C. Jasmine realizes a taxable capital gain of $400.
D. Jasmine realizes interest income of $400.
Explanation: Jasmine realizes interest income of $400 because she bought a strip bond, which is a bond that has its principal and coupon payments separated and sold individually. Jasmine bought the principal-stripped bond, also known as a zero-coupon bond, which pays no interest until maturity. The difference between the purchase price and the face value at maturity is considered interest income and is taxable in the year it is received.
Which investor's needs would be BEST met with an income trust?
A. Tina wants a product that guarantees the return of at least 75% of her capital upon maturity of the contract or upon her death.
B. Leanne wants a product that employs alternative strategies such as leverage and short selling to amplify returns.
C. Gary wants to invest in a product which provides a consistent cash flow of interest, royalties, and lease payments passed along to unitholders.
D. Phil wants to invest in a product where the performance is linked to that of an underlying asset and the issuer is obligated to repay his principal at maturity.
Explanation: An income trust is an investment trust that holds income-producing assets, such as debt instruments, royalty interests, or real properties. It can be structured as either a personal investment fund or a commercial trust with publicly traded closed-end fund shares. The main attraction of income trusts, in addition to certain tax preferences for some investors, is their stated goal of paying out consistent cash flows for investors, which is especially attractive when cash yields on bonds are low12.
10 years ago, Felipe opened a registered retirement savings plan (RRSP) account and purchased a mutual fund. The mutual fund purchased included a 7-year deferred sales charge (DSC). At the time of making his investment, him and his Dealing Representative agreed that he had a 25-year growth objective. Since Felipe knew that he was not planning to use his investment until he retired, he was not concerned about the DSC. Although the rate of return did vary from year-to-year, he never noticed his mutual fund having a drop in value. This gave Felipe more confidence in the investment. As a result, he has never made any changes to his investment. What category of Know Your Client (KYC) information has been given?
A. Financial circumstances
B. Investment experience
C. Risk profile
D. Personal circumstances
Explanation: The category of Know Your Client (KYC) information that has been given is investment experience. Investment experience refers to the level of knowledge and familiarity that a client has with various types of investments, such as mutual funds, stocks, bonds, etc. It also includes the client’s past performance, frequency of trading, and length of holding period. In this case, Felipe has given information about his investment experience by stating that he purchased a mutual fund with a deferred sales charge, that he had a 25- year growth objective, that he never noticed his mutual fund having a drop in value, and that he never made any changes to his investment.
Which of the following are obligations on mutual fund dealing representatives imposed by The Proceeds of Crime (Money Laundering) and Terrorist Financing Act?
A. record-keeping of large transactions, account-related information, and other relevant records
B. reporting all financial transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)
C. enhancing public awareness of matters related to money laundering and terrorist financing
D. confirming client identity each time before concluding any transaction
Taylor is chatting with other parents in the park when the conversation turns to registered education savings plans (RESPs). Taylor thinks that most of what they are saying is incorrect. Which of the following statements about self-directed RESPs is TRUE?
A. The government contributes an additional grant for low income families who qualify.
B. Only one beneficiary may be named per RESP.
C. Educational Assistance Payments (EAPs) may only be used for tuition for a postsecondary program.
D. Educational Assistance Payments (EAPs) withdrawn from the plan are not taxable.
Explanation: A self-directed RESP is a type of RESP where the subscriber (the person who opens the plan) has the freedom to choose and manage the investments within the plan, such as stocks, bonds, mutual funds, etc. A self-directed RESP can have one or more beneficiaries (the children who will use the funds for their education) and can be individual or family plans. A self-directed RESP is eligible for the Canada Education Savings Grant (CESG), which is a 20% matching grant on the first $2,500 of annual contributions per beneficiary, up to a lifetime limit of $7,200. Additionally, low income families who qualify may receive an extra 10% or 20% on the first $500 of annual contributions per beneficiary, depending on their net family income. This is called the Additional CESG. Educational Assistance Payments (EAPs) are the payments made from the RESP to the beneficiary when they enroll in a qualifying post-secondary program. EAPs consist of the CESG, the Additional CESG, and any income or growth earned within the plan. EAPs may be used for any education-related expenses, such as tuition, books, transportation, accommodation, etc. EAPs are taxable in the hands of the beneficiary, who usually has a lower tax rate than the subscriber.
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