Regarding non-registered segregated funds, which of the following statements is true concerning the taxation of investment income?

Question: Regarding non-registered segregated funds, which of the following statements is true concerning the taxation of investment income?

Answer options:

• Capital gains are always 100% taxable as active business income each year, regardless of realization. ✅ Income earned within the fund (e.g., interest, dividends, capital gains) is attributed to the annuitant annually and taxed as if they earned it directly.
• The annuitant is only taxed when withdrawals are made from the fund, and only on the portion exceeding their adjusted cost basis.
• Investment income accumulates tax-deferred until the contract matures or is collapsed, similar to Registered Retirement Savings Plans (RRSPs).

Correct answer: Income earned within the fund (e.g., interest, dividends, capital gains) is attributed to the annuitant annually and taxed as if they earned it directly.

Explanation: Under the attribution rules for segregated funds, the investment income (interest, dividends, capital gains) earned within the fund is attributed to the annuitant annually and taxed in their hands as if they earned it directly. This often results in annual taxation for the annuitant, as outlined in the Income Tax Act (Canada) regarding investment income from non-registered contracts.