Canadian Securities Course (CSC) Level 2 Practice Exam

What taxation characteristic applies to the death benefit in segregated funds?

1. Guarantees are taxable but the death benefit is tax free.

2. Income goes to the contract holder, allocated per unit.

3. After an increase in NAVPS, gains/losses are passed to the holders.

4. Legal process for the deceased related to taxation.

The correct answer is: Income goes to the contract holder, allocated per unit.

The most applicable taxation characteristic for the death benefit in segregated funds is that the death benefit is generally received tax-free by the beneficiary. This is because segregated fund contracts are considered to be insurance products, and the death benefit paid out is not subject to income tax. This means that the full amount of the death benefit can be transferred to the beneficiaries without being reduced by taxes. Choosing the option that income goes to the contract holder, allocated per unit, doesn't accurately address the specific taxation characteristics of the death benefit itself. Instead, it pertains more to the income accrued within the fund during the lifetime of the contract holder. The taxation of segregated funds is structured such that any income earned within the fund may be taxable, while the death benefit is generally exempt, highlighting an important distinction in the tax treatment associated with these contracts. This clear distinction underscores why the accurate characteristic regarding the death benefit is that it remains tax-free for beneficiaries.