Canadian Securities Course (CSC) Level 2 Practice Exam

Which type of income increases due to ETF dividends and interest according to the provided text?

1. Capital gains

2. Ordinary income

3. Return on capital

4. Low ACB

The correct answer is: Ordinary income

The correct answer is ordinary income, as this type of income is directly impacted by dividends and interest received from Exchange-Traded Funds (ETFs). When investors receive dividends from ETFs, these payments are typically classified as ordinary income for tax purposes. Similarly, any interest income earned from fixed-income ETFs also contributes to ordinary income. In the context of the provided choices, capital gains represent the profit made when an asset is sold for more than its purchase price, and they are not directly influenced by the dividends or interest generated by an ETF. Return on capital refers to a distribution that reduces the investor's adjusted cost base (ACB) in the investment, which does not contribute to current income. Low ACB relates to the adjusted cost base of the investment and does not refer to a type of income generated. Thus, the understanding that dividends and interest from ETFs add to ordinary income is why this selection is correct.