Free IFSE Institute CIFC Practice Exam with Questions & Answers | Set: 5

A put option is a contract that gives the buyer the right, but not the obligation, to sell an underlying stock at a specified price (the strike price) within a specified time period (the expiration date). The seller of a put option is obligated to buy the stock if the buyer exercises the option. Patrick can purchase put options for the fund’s existing assets, which means he can lock in a minimum selling price for his stocks in case the market value drops below the strike price. This way, he can protect against potential losses and hedge his portfolio against market risk. References: What Is a Put Option and How to Use It With Example - Investopedia, How to Hedge With Stock Index Futures - Investopedia

LSIFs are a type of investment fund that provide venture capital to small and medium-sized Canadian businesses, while offering tax benefits to investors. However, LSIFs are also considered high-risk and illiquid investments, as they invest in private companies that may not have a proven track record or marketability. Therefore, LSIFs are not suitable for investors with a short-term time horizon or a low risk tolerance. Investors who buy LSIFs receive a 15% federal tax credit and may also receive an additional provincial tax credit, depending on the province where they reside. However, these tax credits are conditional on holding the LSIF investment for at least 8 years. If investors redeem their LSIF investment before the 8-year period, they will have to repay the tax credits they received.

References: Canadian Investment Funds Course, Chapter 4: Types of Investments1

A LIF is a type of registered retirement income fund that is used to hold and pay out locked-in pension funds. A LIF has both a minimum and a maximum withdrawal limit for each calendar year, which are determined by the federal or provincial pension legislation, the age of the annuitant, and the value of the fund. The minimum withdrawal limit is similar to that of a RRIF, but the maximum withdrawal limit is intended to ensure that the LIF provides income for the lifetime of the annuitant123

References = Canadian Investment Funds Course (CIFC) - Module 3: Registered Plans - Section 3.4: Life Income Fund (LIF)4 and web search results from search_web(query="maximum withdrawal limit for LIF RRSP RRIF DPSP")123

4: https://www.ifse.ca/wp-content/uploads/2021/08/CIFC-Module-3.pdf

Contributed funds grow tax-free within the plan3. This means that any income or capital gains earned by the investments in an RESP are not taxed until they are withdrawn3. This allows the plan to grow faster than a taxable account with the same investments and contributions3. The other statements are incorrect. Contributions to RESPs are not tax deductible3. This means that you cannot deduct the amount you contribute to an RESP from your taxable income3. However, you do not have to pay tax on the contributions when they are withdrawn from the plan3. There is no yearly contribution limit per beneficiary, but there is a lifetime contribution limit of $50,000 per beneficiary3. This means that you can contribute any amount to an RESP in any given year, as long as you do not exceed the lifetime limit for each beneficiary3. RESPs must be collapsed by the end of the 35th year of its starting date3. This means that you have up to 35 years to use the funds in an RESP for educational purposes or transfer them to another plan3. If you do not use or transfer the funds by then, you have to close the plan and pay tax on the accumulated income portion3. References: Unit 8: Retirement

The Mutual Fund Dealers Association of Canada (MFDA) is the self-regulatory organization (SRO) that regulates mutual fund dealers in Canada, except in Québec. The MFDA is responsible for setting and enforcing rules and standards of conduct for its members and their representatives, as well as conducting compliance reviews and investigations. Rashad works for a mutual fund dealer that is registered in all provinces and territories of Canada, including Alberta, where he is based. Therefore, his client files will be part of a compliance review by the MFDA, which is the applicable SRO for his firm and jurisdiction.

References = Canadian Investment Funds Course, Unit 7: The Regulatory Environment, Lesson 1: The Regulatory Framework, Section 7.1.2: Self-Regulatory Organizations (SROs) 1; MFDA website 2

The Home Buyers’ Plan (HBP) is a program that allows eligible first-time home buyers to withdraw up to $35,000 from their registered retirement savings plans (RRSPs) to buy or build a qualifying home without paying any tax on the withdrawal. The withdrawn amount must be repaid to the RRSP over a period of up to 15 years, starting from the second year after the withdrawal. If the required repayment for a year is not made, it is added to the taxpayer’s income and subject to tax. Therefore, option B describes a feature of the HBP. The other options are not correct descriptions of the HBP. Option A is false because to qualify as a first-time home buyer, you or your spouse must not have owned and lived in another home as your principal place of residence during the four-year period before the date of withdrawal. Option C is false because a qualifying home must be purchased or built before October 1 of the year following the year of withdrawal. Option D is false because if you have a spouse or common-law partner, each of you can withdraw up to $35,000 from your RRSPs, not $50,000. References: [Home Buyers’ Plan (HBP)], [Home Buyers’ Plan (HBP) - Canada.ca], [Home Buyers’ Plan (HBP) | GetSmarterAboutMoney.ca]

Gerard’s investment time horizon is the length of time he plans to hold his investment until he needs to use the money for his specific goal. In this case, Gerard’s goal is to use his mutual fund portfolio to meet the 20% down payment requirement to buy a house for $650,000. Therefore, his investment time horizon is determined by how long it will take him to accumulate enough money in his portfolio to cover the down payment amount. Assuming that Gerard does not withdraw any money from his portfolio and that his portfolio earns a constant annual rate of return of 6%, we can use the following formula to calculate how long it will take him to reach his goal:

FV=PV×(1+r)n+PMT×r(1+r)n−1​

where:

• FV is the future value of the portfolio
• PV is the present value of the portfolio
• r is the annual interest rate
• n is the number of years
• PMT is the monthly payment

We can rearrange the formula to solve for n:

n=log(1+r)logPV+PMT×r1​FV−PMT×r1​​​

Plugging in the given values, we get:

n=log(1+0.06)log40,000+1,500×0.061​130,000−1,500×0.061​​​

n=4.98

Therefore, Gerard’s investment time horizon is approximately 5 years, not considering market fluctuations. This means that he will need to invest his money in a way that matches his risk tolerance and expected return for this time period.

References:

• Canadian Investment Funds Course (CIFC) Study Guide, Chapter 4: Mutual Funds, Section 4.6: Asset Allocation and Diversification, page 4-271
• Future Value of an Annuity Definition - Investopedia2

Unused RRSP contribution room is the amount of RRSP contributions that you did not deduct in previous years and are available to deduct in the current year. Unused RRSP contribution room can be carried forward to future years indefinitely, until you use it up or reach the age of 71. You can find your unused RRSP contribution room on your notice of assessment or by logging into your Canada Revenue Agency account. References: What to do with unused RRSP, PRPP or SPP contributions

 Investment dealers are people or firms who buy and sell securities for their own account, whether through a broker or otherwise. They play an important role in the Canadian and global financial markets because they are market makers, create liquidity, and help promote long-term growth in the market. They also provide investment services to investors, such as underwriting securities, raising capital, and offering advice. By assisting with the exchange of capital for a financial instrument, they facilitate the flow of funds between savers and borrowers, and between different sectors and countries. The other options are not accurate descriptions of the role of investment dealers. References: Dealers: Definition in Trading, Meaning and Comparison to Brokers, Investment Dealers Definition

The statement that is true about Marta’s situation is option D. A registered retirement income fund (RRIF) is a type of registered account that provides income in retirement by converting savings from an RRSP or other sources. A RRIF holder must withdraw a minimum amount from their RRIF each year, starting from the year after they open their RRIF. The minimum amount is calculated based on a percentage factor set by the Canada Revenue Agency (CRA) and the value of the RRIF at the beginning of each year. However, due to the COVID-19 pandemic, the CRA has reduced the required minimum withdrawals from RRIFs by 25% for 2020 and 2021. Therefore, Marta does not have to withdraw the minimum amount this year if she chooses to take advantage of this temporary measure. Therefore, option D is true about Marta’s situation. The other statements are not true about Marta’s situation. Option A is false because she will not be able to continue contributing to her RRIF and be subject to the same annual limits as her RRSP; rather, she will not be able to make any further contributions to her RRIF once she converts her RRSP to a RRIF. Option B is false because she will not incur a tax liability when she converts her RRSP to a RRIF; rather, she will only pay tax on the amount that she withdraws from her RRIF each year. Option C is false because she will not be subject to annual maximum withdrawal limits; rather, she will be able to withdraw any amount from her RRIF as long as she meets the minimum withdrawal requirement. References: [Registered Retirement Income Fund (RRIF) | GetSmarterAboutMoney.ca], [Making RRIF withdrawals | GetSmarterAboutMoney.ca], [RRIF minimum withdrawal factors], [RRIFs: Temporary 25% reduction in minimum withdrawals for 2020 and 2021]