An advisor is recommending that a client, Mary, purchase a 10-year provincial strip bond for her tuition savings goal. The advisor suggests holding the bond in Mary’s Tax-Free Savings Account (TFSA) rather than her non-registered account. What is the primary reason for this recommendation?
4 attempts · 75% correct
To eliminate reinvestment risk, which is higher in registered accounts.
To benefit from the 50% capital gains inclusion rate on the bond's growth.
To shelter the annual imputed interest from being taxed as interest income.Correct
To reduce the high duration and price sensitivity of the zero-coupon instrument.
Why
Strip bonds are subject to annual tax on imputed interest (phantom income). Holding them in a TFSA shelters this growth from annual taxation.
