CFP Exam (Canada) flashcards

33 cards. Read the term and the definition here. The deck at the top of this page is optional.

Fiduciary duty

A legal obligation to act solely in the client's best interest, placing client interests ahead of the planner's own. It requires full disclosure of conflicts and prudent, unbiased advice.

Know-your-client rule

The requirement to gather and document a client's personal, financial, and risk-tolerance information before recommending any product, and to update it when circumstances materially change.

Material conflict of interest

Any circumstance, relationship, or compensation arrangement that could reasonably bias a recommendation. It must be disclosed in writing and managed, not merely acknowledged verbally.

Six-step planning process

Establish engagement, gather client data and goals, analyze the current situation, develop recommendations, implement the plan, and monitor with periodic review. Each step is documented.

Net worth

Total assets at fair market value minus total liabilities at a point in time. It measures accumulated wealth, unlike a cash flow statement which measures inflows and outflows over a period.

Emergency fund

Liquid savings covering three to six months of essential expenses. Longer coverage suits single-income households, variable income, self-employment, or dependants with limited alternatives.

Gross debt service ratio

Monthly housing costs (mortgage principal and interest, property taxes, heating, and half of condo fees) divided by gross monthly income. Lenders typically cap it near 32–39%.

Total debt service ratio

All monthly debt payments, including housing costs and consumer debt, divided by gross monthly income. Lenders commonly require it at or below 40–44% for mortgage approval.

Liquidity ratio

Liquid assets divided by monthly expenses. A result of three to six indicates sufficient short-term resilience to absorb income interruption without forced asset sales.

Savings rate

Income minus consumption, divided by gross income. In early accumulation years it drives goal attainment more than investment return because compounding has little time to work.

Systematic versus unsystematic risk

Unsystematic risk is company- or sector-specific and eliminated by diversification. Systematic risk is market-wide and cannot be diversified away, so it earns a risk premium.

Risk tolerance components

Risk attitude is willingness to accept volatility; risk capacity is the financial ability to absorb loss. The suitable allocation is governed by the lower of the two.

Bond duration

A measure of a bond's price sensitivity to interest rate changes. Duration of seven implies roughly a seven percent price change for a one percent change in yield.

Sharpe ratio

Portfolio return minus the risk-free rate, divided by the portfolio's standard deviation. It expresses excess return earned per unit of total risk taken.

Time-weighted return

A return calculation that removes the effect of external cash flows, isolating manager performance. Money-weighted return instead reflects the investor's actual dollar experience.

Rebalancing threshold

A pre-set drift trigger, often five percent absolute or twenty percent relative, that prompts returning holdings to target weights and enforces disciplined sell-high, buy-low behaviour.

Marginal versus average tax rate

The marginal rate applies to the next dollar of income and governs planning decisions. The average rate is total tax divided by total income and understates the cost of added income.

Capital loss treatment

Capital losses offset capital gains only, not other income. Unused losses may be carried back three years against prior gains or carried forward indefinitely.

Attribution rules

Income from property transferred to a spouse or minor child may be taxed back to the transferor. Prescribed-rate spousal loans and certain elections can avoid or limit attribution.

RRSP versus TFSA

RRSP contributions are deductible and growth is tax-deferred but withdrawals are taxable. TFSA contributions are not deductible, growth and withdrawals are tax-free, and room restores annually.

In-kind charitable gift

Donating appreciated publicly traded securities directly to a registered charity can eliminate the capital gain inclusion while still generating a donation tax credit.

Replacement ratio

Estimated retirement spending as a percentage of pre-retirement income. Lower earners often need a higher ratio because progressive taxation and government benefits replace less.

CPP start age

Canada Pension Plan benefits may begin from age 60 with a permanent reduction, or as late as 70 with an increase. Delaying raises the inflation-indexed lifetime benefit.

OAS clawback

The recovery tax reduces Old Age Security when net income exceeds an annual threshold. It acts as an additional effective marginal tax rate on income in the recovery range.

RRIF minimum withdrawal

A prescribed minimum percentage of the RRIF's value that must be withdrawn each year, based on age. A younger spouse's age may be elected to lower the minimum.

Sequence-of-returns risk

The danger that poor investment returns early in the withdrawal phase permanently impair a portfolio, even if long-run average returns are adequate. A cash buffer mitigates it.

Insurable risk criteria

Insurers require many similar exposure units, accidental and measurable loss, determinable timing, and no catastrophic concentration. Speculative and certain losses are not insurable.

Human life value approach

A coverage method valuing the insured's future earnings net of personal consumption, discounted to present value. It estimates the economic loss survivors would suffer.

Needs approach

Coverage equals debts, income replacement, education, and final expenses, minus existing resources and government benefits. It targets the survivors' actual funding gap.

Co-insurance clause

A property policy provision requiring the insured to carry a minimum percentage of replacement cost. If underinsured, claims are reduced proportionally to the shortfall.

Own-occupation disability

A disability definition that pays when the insured cannot perform the duties of their own occupation. It is broader and costlier than any-occupation coverage.

Probate avoidance

Assets passing outside the will, such as jointly held property with right of survivorship, named beneficiary plans, and trust assets, generally avoid probate fees and delays.

Deemed disposition at death

Most capital property is treated as sold at fair market value on death, triggering capital gains tax unless a spousal rollover, principal residence exemption, or other relief applies.