IFSE Institute CIFC - Canadian Investment Funds Course Exam

Monetary policy is the process by which the central bank, in Canada’s case the Bank of Canada, influences the supply and demand of money in the economy, and thereby affects the level of interest rates, inflation, and economic activity. One of the main tools of monetary policy is the overnight rate, which is the interest rate that banks charge each other for short-term loans. The Bank of Canada sets a target for the overnight rate and adjusts it periodically to achieve its inflation target of 2%. By increasing or decreasing the overnight rate, the Bank of Canada affects the cost and availability of credit for consumers and businesses, and influences their spending and saving decisions. For example, if the Bank of Canada increases the overnight rate, it becomes more expensive to borrow money, which reduces the demand for loans and credit, and slows down economic growth and inflation. Conversely, if the Bank of Canada decreases the overnight rate, it becomes cheaper to borrow money, which increases the demand for loans and credit, and stimulates economic growth and inflation.

References: Canadian Investment Funds Course, Chapter 1: The Canadian Financial Services Industry1

Eligible dividends from a publicly-listed Canadian corporation would provide the most favourable tax treatment for Bernadette, who is in the top tax bracket. Eligible dividends are subject to a lower tax rate than other types of income because they qualify for the enhanced dividend tax credit. This credit is intended to reduce the double taxation of corporate income, which occurs when a corporation pays tax on its earnings and then distributes those earnings to its shareholders, who also pay tax on them. Dividends received from a large foreign corporation do not qualify for the dividend tax credit and are taxed at the same rate as interest income. Coupon payments from Government of Canada bonds are also fully taxable as interest income. Capital gains from a large Canadian corporation are taxed at a lower rate than interest income, but higher than eligible dividends, because only 50% of the gain is included in taxable income. References: Capital gains, interest and dividends: How they’re taxed in Canada, How Are Dividends Taxed in Canada?

 Daisy could seek permission from her dealer to request a client mobility exemption with the Alberta Securities Commission. This exemption allows a registered individual in one jurisdiction to service a client who moves to another jurisdiction, without having to register in the new jurisdiction, subject to certain conditions. Some of these conditions are that the individual must be registered with a dealer that is registered in both jurisdictions, the individual must not have more than five clients in the new jurisdiction, and the individual must notify the regulator in the new jurisdiction of the exemption. References: Client Mobility Exemption

Gifts and benefits may be provided to a client if your employer is aware of the benefits and has given approval. This is one of the rules concerning conflicts of interest set by the MFDA. A conflict of interest is a situation where a person’s personal interests conflict with their professional obligations or duties. Gifts and benefits may create a conflict of interest if they influence or appear to influence the person’s judgment or actions. Therefore, the MFDA requires that any gifts and benefits given or received by a mutual fund dealer or its representatives must be disclosed to and approved by the dealer, and must not compromise or appear to compromise the dealer’s or representative’s integrity or objectivity. References: MFDA Bulletin #0756-P - Conflicts of Interest

The national self-regulatory organization (SRO) for investment dealers is the Investment Industry Regulatory Organization of Canada (IIROC). An SRO is a non-governmental organization that sets and enforces rules and standards for its members in a specific industry or profession. IIROC is an SRO that oversees all investment dealers and their trading activity in Canada’s debt and equity markets. IIROC’s mandate is to protect investors and support healthy capital markets by ensuring high standards of conduct, competence, and compliance among its members and their representatives. Therefore, option D is correct regarding the national SRO for investment dealers. The other options are not correct or relevant to the question. Option A is false because there is no such organization as the National Securities Commission in Canada; rather, there are provincial and territorial securities regulators that form the Canadian Securities Administrators (CSA), which is a council of securities regulators that coordinates and harmonizes regulation for the Canadian capital markets. Option B is false because the Mutual Fund Dealers Association of Canada (MFDA) is not the national SRO for investment dealers; rather, it is the national SRO for mutual fund dealers and their representatives in Canada. Option C is false because the Canadian Securities Administrators (CSA) is not the national SRO for investment dealers; rather, it is a council of securities regulators that coordinates and harmonizes regulation for the Canadian capital markets. References: [IIROC - Home], [SROs | GetSmarterAboutMoney.ca], [CSA - Home]

To calculate Peter’s net federal tax liability for the year, we need to follow these steps:

Step 1: Calculate Peter’s taxable income. This is the amount of income that is subject to federal income tax. It is equal to his earned income from employment plus his net capital gain plus his grossed-up dividend income. A net capital gain is 50% of the capital gain realized from selling an asset. A grossed-up dividend income is the actual dividend received plus a percentage of the dividend that reflects the corporate tax paid by the issuer. According to the image, the dividend gross-up rate is 15.02%. Therefore, Peter’s taxable income is:

50000+0.5×15000+(500×2)×(1+0.1502)=68251.00

Step 2: Apply the federal tax rates to Peter’s taxable income according to the tax brackets shown in the image. The federal tax rates are progressive, meaning that higher income is taxed at higher rates. Therefore, Peter’s federal tax before credits is:

0.15×(48535−0)+0.205×(68251−48535)=11293.69

Step 3: Subtract the federal tax credits from Peter’s federal tax before credits. A tax credit is an amount that reduces the tax payable by a taxpayer. There are two types of federal tax credits: non-refundable and refundable. Non-refundable tax credits can only reduce the tax payable to zero, but not below zero. Refundable tax credits can reduce the tax payable below zero, resulting in a refund to the taxpayer. In this question, we assume that Peter only has two non-refundable tax credits: the basic personal amount and the dividend tax credit. The basic personal amount is a fixed amount that every taxpayer can claim to reduce their taxable income. According to this site, the basic personal amount for 2021 is $13,808. The dividend tax credit is a percentage of the grossed-up dividend income that reflects the corporate tax paid by the issuer and avoids double taxation. According to this site, the federal dividend tax credit rate for eligible dividends in 2021 is 15.0198%. Therefore, Peter’s federal tax credits are:

0.15×13808+0.150198×(500×2)×0.1502=2100

Step 4: Subtract Peter’s federal tax credits from his federal tax before credits to get his net federal tax liability. This is the amount of federal income tax that Peter has to pay or has overpaid for the year. Therefore, Peter’s net federal tax liability is:

11293.69−2100=9193.69

Hence, option B is correct. References: Canadian Investment Funds Course (CIFC) | IFSE Institute, Federal Income Tax Rates for Canada - TurboTax Canada Tips, Capital Gains Tax in Canada | Wealthsimple, Dividend Tax Credit | TurboTax Canada Tips, Basic Personal Amount (BPA)

Discretionary trading is a type of trading activity where the advisor makes investment decisions on behalf of the client without obtaining the client’s prior consent for each transaction. Discretionary trading is only allowed if the client has signed a discretionary management agreement with the advisor and the advisor is registered as a portfolio manager. A limited authorization form (LAF) does not grant the advisor the authority to engage in discretionary trading. A LAF only allows the advisor to execute trades that are initiated by the client, such as pre-authorized contributions or withdrawals. Therefore, Khuyen has performed discretionary trading by switching Bao’s funds without consulting him, which is a violation of her registrant responsibilities and ethical standards. References:

Canadian Investment Funds Course (CIFC) Study Guide, Chapter 2: The Sales Process, Section 2.4: Ethics and Compliance, page 2-161

Discretionary Trading Definition - Investopedia2

The correct answer is D. If Jacinta shares the list with Saabir without obtaining the clients’ prior consent, she will be in breach of the Personal Information Protection and Electronic Documents Act (PIPEDA).

PIPEDA is the federal privacy law for private-sector organizations in Canada. It sets out the ground rules for how businesses must handle personal information in the course of their commercial activity. One of the key principles of PIPEDA is consent. This means that organizations must obtain meaningful consent from individuals before collecting, using, or disclosing their personal information, unless an exception applies. Consent must be obtained for the original purpose of collecting the information, and for any new purpose that arises later. Consent can be express or implied, depending on the sensitivity of the information and the reasonable expectations of the individual.

In this scenario, Jacinta’s clients’ personal information is sensitive, as it relates to their financial situation and investment goals. Jacinta’s clients would not reasonably expect that their information would be shared with Saabir, who is not affiliated with WealthSource Partners Inc., for the purpose of marketing insurance products. Therefore, Jacinta must obtain express consent from her clients before disclosing their information to Saabir. If she does not, she will violate PIPEDA and risk legal action from her clients or from the Office of the Privacy Commissioner (OPC).

This question would give you the most information regarding your client’s familiarity with investing because it tests their basic knowledge of one of the fundamental concepts in finance. The relationship between risk and return is the trade-off that investors face when choosing between different investments. Generally, the higher the risk, the higher the expected return, and vice versa. A client who understands this relationship would be able to evaluate the potential outcomes and costs of their investment decisions and choose the ones that match their risk tolerance and return objectives. A client who does not understand this relationship might have unrealistic expectations or make unsuitable choices.

References = Risk-Return Tradeoff Definition - Investopedia, Risk and Return - Corporate Finance Institute, Risk and Return: An Introduction - Morningstar

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. References: Strip Bonds: Definition, How They Work, Returns, and Example