IMT 2 (2026): International Investing and Wealth Risks

Topic snapshot

Practice cases

These cases are original Securities Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.

Case 1

Topic: International Investing and Wealth Risks

Household tax review

Amrita and Daniel Roy, ages 48 and 51, are Ontario professionals with a discretionary household portfolio. They are in the top marginal tax bracket, need no portfolio withdrawals for at least 12 years, and want to keep their strategic mix near 65% equity / 35% fixed income. Their IPS says that improving after-tax compounding is an important secondary goal, as long as market exposure and risk stay broadly unchanged.

The portfolio manager finds that several tax-inefficient holdings have drifted into the joint non-registered account, while much of the low-turnover equity exposure sits inside registered accounts. The Roys are comfortable using ETFs and do not need high cash distributions. The manager can improve asset location mainly by changing what each account holds, not by seeking new contribution room.

Assumption for this case: In the non-registered account, fully taxable interest and frequent taxable distributions are generally less tax-efficient than Canadian eligible dividends and deferred capital gains from low-turnover equity holdings. Ignore foreign withholding-tax nuances.

Exhibit: Current household placement

The Roys ask for a tax-minimization plan that does not materially alter the household’s target asset mix or expected risk.

Question 1

Which high-level tax-minimization approach best fits the Roys’ situation?

• A. Increase high-distribution funds across accounts to maximize annual cash flow.
• B. Realize more gains now so future taxes will be lower regardless of location.
• C. Move tax-inefficient income assets into registered accounts and keep low-turnover equity in the non-registered account.
• D. Keep asset location unchanged and focus only on pre-tax manager selection.

Best answer: C

What this tests: International Investing and Wealth Risks

Explanation: The strongest high-level response is better asset location, not a change in the household’s strategic mix. The Roys do not need current income and currently hold interest-paying and high-turnover funds in the non-registered account, where tax drag is highest.

Tax minimization here is mainly an asset-location problem. When a household wants the same overall 65% equity / 35% fixed income mix but better after-tax compounding, the portfolio manager should place the least tax-efficient return sources - such as fully taxable interest and funds that distribute frequent taxable income - inside RRSPs or TFSAs when possible, and leave lower-turnover equity exposures in the non-registered account. That preserves market exposure while reducing annual tax drag. In the Roys’ case, the bond fund and active global dividend fund create current taxable income in the joint account, while more tax-efficient equity ETFs occupy registered accounts. Maximizing cash distributions or focusing only on pre-tax returns misses the stated objective. The key is to improve after-tax compounding without changing household risk.

• Cash-flow focus High-distribution funds raise current taxable income, which works against the Roys’ goal.
• Pre-tax only Better manager selection alone does not correct the existing asset-location mismatch.
• Acceleration misconception Realizing gains now does not solve the ongoing annual taxation of interest and frequent distributions.

This directly reduces annual tax drag while keeping the household’s 65/35 exposure broadly unchanged.

Question 2

Which current holding is least suitable for the non-registered account because its return is primarily fully taxable?

• A. Short-term corporate bond fund
• B. U.S. broad-market ETF
• C. Canadian equity ETF
• D. Active global dividend mutual fund

Best answer: A

What this tests: International Investing and Wealth Risks

Explanation: The short-term corporate bond fund is the clearest mismatch for the non-registered account because its return comes mainly from ongoing interest, which is taxed currently. The Roys do not need portfolio income, so there is little reason to leave that tax profile in taxable space.

Among the holdings shown, the short-term corporate bond fund is the least suitable for the non-registered account under the case assumption. Bond-fund returns are largely delivered through interest, which creates immediate annual tax drag. By contrast, low-turnover equity holdings can defer some taxation through unrealized capital gains, and Canadian equity can also deliver more favourable dividend treatment. The active global dividend fund is also not ideal because its turnover and distributions create taxable events, but the bond fund is the clearest example of a holding whose return is primarily current fully taxable income. For a household focused on after-tax compounding rather than cash payouts, that makes it the first mismatch to address.

• Low-turnover equity The Canadian equity ETF already fits taxable space better because it is designed for lower turnover.
• Broad U.S. equity It can still create foreign dividend income, but it is not mainly an interest vehicle.
• Active global fund It is also tax-inefficient, yet the question targets the holding driven most directly by fully taxable current income.

Its return is delivered mainly as current interest income, the least suitable tax profile for this taxable account under the case assumptions.

Question 3

If the Roys keep global equity exposure in the non-registered account, which change most improves tax efficiency?

• A. Replace the active global dividend mutual fund with a low-turnover broad global equity ETF.
• B. Replace it with a short-term bond ETF.
• C. Replace it with a covered-call global equity fund.
• D. Replace it with a higher-yield global dividend fund.

Best answer: A

What this tests: International Investing and Wealth Risks

Explanation: To keep global equity exposure but cut tax drag, the Roys should replace the high-turnover active global dividend mutual fund with a low-turnover broad global equity ETF. That keeps the asset class while reducing taxable distributions and manager-driven realization of gains.

When the goal is to keep the same broad exposure while improving after-tax results, the product structure matters. A low-turnover broad global equity ETF is generally more tax-efficient than an active global dividend mutual fund because it tends to distribute less current income and realize fewer gains internally. That supports deferral and cleaner after-tax compounding in the non-registered account. A higher-yield dividend mandate or a covered-call approach does the opposite by emphasizing current cash distributions, which the Roys do not need. Replacing the fund with a short-term bond ETF would also change the household’s asset mix rather than simply improving the tax efficiency of the global-equity sleeve. The best choice preserves exposure and reduces taxable leakage.

• Yield chasing Higher-yield global funds increase the taxable cash flow the Roys want to minimize.
• Option-income overlay Covered-call strategies usually turn more of total return into current distributions.
• Asset-mix drift A short-term bond ETF is not a like-for-like substitute for global equity exposure.

It preserves global equity exposure while lowering turnover-driven and income-driven taxable distributions.

Question 4

After implementing the plan, which monitoring approach best tests whether the tax strategy is working?

• A. Track annual cash distributions received from all holdings.
• B. Compare after-tax household returns with an after-tax benchmark using the same strategic mix.
• C. Count how many trades were used to rebalance the accounts.
• D. Compare only the pre-tax return of the taxable account with the S&P/TSX.

Best answer: B

What this tests: International Investing and Wealth Risks

Explanation: The right test is an after-tax household-level comparison against an after-tax benchmark with the same strategic mix. Asset location shifts where returns are earned, so pre-tax or single-account comparisons can miss whether the tax strategy actually improved total wealth accumulation.

Tax minimization should be evaluated at the household level and on an after-tax basis. The Roys are not trying to beat a different market exposure; they are trying to keep roughly the same 65% equity / 35% fixed income mix while reducing tax drag. That means the benchmark should reflect the same strategic allocation and be measured after tax, or at least alongside an explicit tax-drag calculation. Looking only at the taxable account’s pre-tax return ignores what happened inside RRSPs and TFSAs, and comparing it with a single-equity index is also a benchmark mismatch. Counting cash distributions or trades is even less informative because more distributions can mean worse tax efficiency. The best monitoring approach isolates whether the new asset location improved after-tax compounding without changing risk.

• Wrong level A taxable-account-only view misses offsetting changes made inside registered accounts.
• Wrong benchmark A single equity index does not match the Roys’ diversified household mandate.
• Wrong proxy More cash distributions or fewer trades do not reliably show lower tax drag.

This measures whether tax drag fell without confusing the result with a change in market exposure or account mix.

Case 2

Topic: International Investing and Wealth Risks

Lee Family Foreign-Income Sleeve

Nadia Fong, CFA, manages the Lee family’s CAD 2.4 million discretionary portfolio. Daniel and Priya Lee are Ontario residents in their early 50s, in a high marginal tax bracket, and still in the accumulation stage. After trimming a concentrated Canadian bank position, they want to add a CAD 360,000 foreign-equity income sleeve across their joint non-registered account, RRSPs, and TFSAs. They do not need portfolio cash flow for at least 10 years.

Nadia notes that the shortlisted funds are similar on diversification and expected volatility, so asset location and after-tax implementation will drive the choice more than security selection.

Working assumptions for this review

• Focus only on recurring foreign cash dividends; ignore capital gains, fees, and currency effects.
• If foreign tax is withheld on dividends paid into the joint non-registered account, the withheld amount may be eligible for a Canadian foreign tax credit; exact limits are not provided.
• For this case, assume dividends from U.S.-listed U.S. securities held directly in the RRSP receive treaty relief from U.S. withholding.
• The TFSA does not receive that treaty benefit.
• Tax withheld inside the RRSP or TFSA generally cannot be claimed by the Lees as a foreign tax credit.

Nadia tells her associate, “Do not assume the same pre-tax yield means the same after-tax result. First determine whether a foreign-tax-credit issue, a treaty issue, or fund structure is actually relevant.”

Question 5

Nadia is deciding where to hold the International Dividend ETF. In which account is foreign-tax-credit availability most directly relevant?

• A. TFSA
• B. Joint non-registered account
• C. RRSP
• D. It is equally relevant everywhere

Best answer: B

What this tests: International Investing and Wealth Risks

Explanation: A foreign tax credit matters when foreign tax is actually withheld and may be claimable on the client’s Canadian return. Under the stated assumptions, that possibility exists in the joint non-registered account, not inside the RRSP or TFSA.

The key decision point is the account wrapper, not just the fund name. The International Dividend ETF distributes foreign-source dividends, so Nadia must first ask whether any foreign tax withheld can be recognized at the client level. The vignette states that withholding in the joint non-registered account may be eligible for a Canadian foreign tax credit, while tax withheld inside the RRSP or TFSA generally cannot be claimed by the Lees. That makes the taxable account the place where the foreign-tax-credit concept is directly relevant. Treaty relief is a separate concept and, in this case, was only stated for direct U.S. holdings in the RRSP.

• Taxable-account focus Foreign tax credits matter when withheld foreign tax may flow through to the client’s Canadian tax position.
• Registered-plan limit The RRSP and TFSA may still face withholding, but the vignette says the client generally cannot claim it there.
• Not equal across accounts The same foreign exposure does not make the tax concept identical in every account type.

That is the only account where the vignette says withheld foreign tax may be eligible for a Canadian foreign tax credit.

Question 6

For the U.S. Dividend ETF, which location decision most clearly turns on the stated treaty assumption?

• A. The treaty is irrelevant to all locations
• B. Placing it in the TFSA
• C. Placing it in the RRSP
• D. Placing it in the joint non-registered account

Best answer: C

What this tests: International Investing and Wealth Risks

Explanation: A treaty concept becomes relevant only when the case gives a treaty-based exception. Here, the only explicit treaty benefit is for U.S.-listed U.S. securities held directly in the RRSP, so that location decision turns on treaty treatment.

The LO here is to identify when a treaty concept matters without importing extra technical detail. The vignette already supplies the critical fact: direct U.S. holdings in the RRSP receive treaty relief from U.S. withholding. That means the RRSP decision for the U.S. Dividend ETF is the one most clearly driven by treaty treatment. By contrast, the joint non-registered account raises the possibility of a Canadian foreign tax credit after withholding occurs, and the TFSA is explicitly denied the treaty benefit. The practical lesson is to use the specific treaty fact given in the case rather than assume every foreign holding receives the same treatment.

• Explicit treaty hook Only the RRSP direct-U.S.-holding fact pattern is tied to a stated treaty benefit.
• Taxable-account distinction In the joint non-registered account, the main question is whether withheld tax may be creditable in Canada.
• TFSA exception The case removes the treaty argument for the TFSA, so it cannot be the best answer.

The vignette expressly gives a treaty-based benefit only for direct U.S. holdings in the RRSP.

Question 7

Which pairing is the clearest example of foreign withholding that the Lees cannot offset under the stated assumptions?

• A. U.S. Dividend ETF in the RRSP
• B. U.S. Dividend ETF in the TFSA
• C. International Dividend ETF in the joint non-registered account
• D. U.S. Dividend ETF in the joint non-registered account

Best answer: B

What this tests: International Investing and Wealth Risks

Explanation: Foreign withholding is most damaging when neither treaty relief nor a client-level foreign tax credit is available. Under the vignette’s assumptions, that is the TFSA holding of the U.S. Dividend ETF.

The best way to assess this is to ask two simple questions: does the case provide treaty relief, and can the client claim a foreign tax credit if tax is still withheld? For the U.S. Dividend ETF in the TFSA, the answer to both is no: the vignette says the TFSA does not receive the treaty benefit, and tax withheld inside the TFSA generally cannot be claimed by the Lees. That makes the withholding a direct after-tax drag. The same ETF in the RRSP gets the stated treaty relief, while taxable-account holdings at least raise the possibility of a foreign tax credit. The key takeaway is that account type can change whether withholding is recoverable or permanent.

• Permanent drag A TFSA foreign-dividend holding can leave withholding unrecovered when no treaty benefit is available.
• RRSP exception The direct U.S. holding in the RRSP is different because the case gives treaty relief there.
• Taxable-account relief Non-registered holdings are not the clearest example of unrecoverable withholding because a foreign tax credit may apply.

The TFSA gets no stated treaty relief and the client generally cannot claim a foreign tax credit for withholding inside it.

Question 8

Before treating the TSX-listed Global Dividend ETF like direct U.S. holdings, what is Nadia’s most important tax due-diligence question?

• A. Whether its benchmark excludes Canada
• B. Whether it distributes monthly or quarterly
• C. Where withholding occurs and who can claim it
• D. Whether it trades in Canadian dollars

Best answer: C

What this tests: International Investing and Wealth Risks

Explanation: The ETF’s TSX listing does not answer the tax question. Because the fund reaches foreign equities through underlying funds, Nadia needs to know at what level withholding occurs and whether any withheld tax remains claimable by the Lees.

Fund structure can change whether a foreign-tax-credit or treaty concept is even relevant at the client level. The Global Dividend ETF is Canadian-listed, but the vignette says it obtains foreign equity exposure through underlying funds. That means Nadia cannot assume it will behave like direct U.S. holdings in the RRSP or like a simple taxable-account foreign dividend receipt. She must identify where withholding happens inside the chain and whether the client can actually claim or benefit from it. This is the right due-diligence question without needing any unstated treaty article or withholding rate. By contrast, trading currency, distribution frequency, and benchmark design do not determine recoverability of withholding tax.

• Listing is not tax treatment A TSX listing alone does not eliminate foreign withholding.
• Structure matters Indirect exposure through underlying funds can change whether withholding is embedded before it reaches the client.
• Operational details are secondary Currency denomination, payout frequency, and benchmark choice do not decide tax-credit or treaty relevance.

Because the fund uses underlying funds, structure determines whether withholding is recoverable or remains embedded.

Case 3

Topic: International Investing and Wealth Risks

Case: Slow Net Worth Growth

Isabelle Chen, 41, is an incorporated anesthesiologist in Calgary. Her spouse, Michael Chen, 43, is a self-employed industrial designer. They ask their discretionary portfolio manager why they feel behind on their goal of optional retirement at age 60, even though their income has been strong for several years. They also want to fund university costs for two children in about 10 to 12 years. All amounts are in CAD.

Their personal RRSPs and TFSAs are fully funded each year. Remaining assets are invested through a non-registered account and Isabelle’s professional corporation account. The combined managed portfolio is globally diversified: 25% Canadian equity, 30% U.S. equity, 15% international equity, 10% emerging markets, and 20% fixed income. Over the last 5 years, the portfolio returned 8.6% annualized versus an IPS benchmark of 8.3%. Total investment costs are 0.72% annually, and the estimated tax drag on the non-registered account is about 0.5% annually.

The couple believe they may have “missed” U.S. technology and India and ask whether a more aggressive international allocation is the missing ingredient. Yet their investable assets rose from $1.05 million to $1.32 million over 5 years, which is materially below what their income level suggested in the original plan.

Exhibit: Recent annual cash-flow snapshot

The portfolio manager’s notes state that emergency reserves and insurance are adequate, there is no single-stock concentration, and the couple have never agreed to a formal annual savings target. Corporate withdrawals often rise after strong bonus months.

Question 9

What is the main impediment to the Chens’ long-term wealth accumulation?

• A. Too little exposure to higher-growth international equities
• B. Management fees across the managed accounts
• C. Estimated taxes in the non-registered account
• D. Household spending that leaves a very low savings rate

Best answer: D

What this tests: International Investing and Wealth Risks

Explanation: The central problem is weak net saving despite very strong household cash flow. Because the portfolio has slightly outperformed its benchmark and stated fees and tax drag are moderate, the case points to spending behaviour as the dominant impediment rather than investment selection.

In wealth accumulation cases, first separate a return problem from a retention problem. Here, the Chens earn $290,000 after tax but add only $22,000 to investments each year, while large discretionary and financing-related spending absorbs most of the rest. At the same time, the managed portfolio earned 8.6% annualized, slightly above benchmark, with ordinary fees and a moderate tax drag.

• High income does not create wealth if little is saved.
• Contribution shortfalls often matter more than modest fee or tax drags.
• Performance-chasing is secondary when the savings rate is the real issue.

The main impediment is lifestyle spending that prevents enough capital from compounding.

• Fees vs cash flow Moderate fees reduce returns, but they are too small relative to the lost compounding from low annual contributions.
• Tax drag Taxes matter, yet the stated tax burden is not large enough to be the dominant explanation.
• Return chasing Wanting more aggressive international exposure is tempting, but benchmark-relative results show the portfolio itself is not the main problem.

High after-tax income is mostly consumed before it reaches investment accounts, leaving only $22,000 of annual net additions.

Question 10

Which case fact most strongly supports that diagnosis of the main impediment?

• A. Tax drag is about 0.5% per year
• B. Investment costs are 0.72% per year
• C. Net additions are only $22,000 on $290,000 after-tax income
• D. The portfolio includes 20% fixed income

Best answer: C

What this tests: International Investing and Wealth Risks

Explanation: The clearest evidence is the gap between after-tax income and actual investing. Contributing only $22,000 out of $290,000 after tax implies a very low savings rate for a high-income household with ambitious retirement goals.

The strongest support comes from the direct cash-flow ratio, not from portfolio construction details. Saving only $22,000 out of $290,000 after tax means the household saves roughly \(22,000 / 290,000 \approx 7.6\%\). For clients with high earnings and a growth mandate, that low retention rate is a much larger barrier to compounding than a 0.72% fee load or a 0.5% tax drag. The 8.6% portfolio return actually weakens the claim that investment selection is the primary problem.

• Use net contributions to diagnose accumulation issues.
• Compare savings behaviour before blaming allocation.
• Treat performance data as supporting context, not the main proof.

The most revealing fact is how little income is allowed to stay invested.

• Strong but indirect drags Fees and taxes reduce after-tax growth, but neither is large enough to dominate this case.
• Allocation debate The fixed-income weight may be discussed in an IPS review, yet it does not explain the weak cash retention.
• Best evidence The contribution-to-income ratio directly identifies the accumulation bottleneck.

That direct cash-flow gap shows the household is retaining too little income for long-term compounding.

Question 11

Given the case facts, what should the portfolio manager prioritize first?

• A. Add thematic international ETFs for growth
• B. Increase equity exposure to raise expected return
• C. Shift bonds to longer duration for more yield
• D. Set a formal savings target and automate surplus investing

Best answer: D

What this tests: International Investing and Wealth Risks

Explanation: When the main impediment is low saving, the first recommendation should change cash-flow behaviour rather than chase more return. A defined savings target with automatic investing is the most direct way to increase the capital base that can compound over time.

The portfolio manager should prioritize an implementation rule that raises the amount of money retained and invested each year. In practice, that means agreeing on a formal savings target, automating transfers after salary or bonus periods, and reducing the discretionary leakage that currently absorbs most of the household’s after-tax cash flow. Those steps directly address the true accumulation constraint.

• Set a minimum annual or monthly contribution target.
• Automate transfers to personal or corporate investment accounts.
• Review large discretionary spending categories against the target.

More risk, thematic international exposure, or bond-yield adjustments may alter return patterns, but they do not fix the primary problem in this case.

• More risk, same behaviour Raising equity exposure can increase volatility without ensuring more capital is actually invested.
• Theme substitution Concentrated international ideas address perceived missed opportunities, not the structural savings shortfall.
• Portfolio fine-tuning Bond adjustments may matter later, but they are secondary until the cash-flow leak is corrected.

The first fix should increase retained capital by converting income and bonus-period cash flow into systematic contributions.

Question 12

Which monitoring measure would best show progress against the main impediment over the next 12 months?

• A. Portfolio duration versus bond index
• B. Net savings rate versus target
• C. Tracking error versus IPS benchmark
• D. Currency hedge ratio on foreign equities

Best answer: B

What this tests: International Investing and Wealth Risks

Explanation: The most useful progress metric is behavioural, not market-based. If the Chens’ net savings rate rises toward a defined target, the main impediment is being addressed; benchmark or risk metrics would miss that change.

The best monitoring variable is net savings rate versus target, such as annual investable contributions divided by after-tax income. That measure directly captures whether the household is retaining more cash for future compounding. By contrast, tracking error, duration, and currency hedge ratios are valid portfolio-monitoring tools, but they do not indicate whether the root wealth-accumulation problem is improving.

• Define the target savings rate in the plan.
• Track actual monthly or quarterly contributions.
• Escalate if discretionary spending causes repeated shortfalls.

For this case, success should be judged first by improved cash retention, not by portfolio analytics alone.

• Benchmark focus Tracking error is useful for oversight of the mandate, but it cannot show whether the household is saving enough.
• Bond analytics Duration helps manage interest-rate exposure, not accumulation discipline.
• Currency detail Hedge ratios matter in international investing, but they are too remote from the main impediment here.

This directly measures whether more of the household’s income is being retained and invested as planned.

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Related focused pages

• Free IMT 2 (2026) Full-Length Case Practice Exam
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• IMT 2 (2026): Asset Allocation and Investment Management
• IMT 2 (2026): Equity Securities
• IMT 2 (2026): Debt Securities
• IMT 2 (2026): Managed Products
• IMT 2 (2026): Portfolio Monitoring and Performance Evaluation

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