QAFP Study 1 - Editable PDF

Last December, Rick started working for MiningCo. As part of his compensation, Rick received a stock option award last month that has a one year vesting period. Rick is a member of MiningCo'.s DPSP which has the maximum vesting period. He makes the maximum contribution to the group RRSP each month....

Last December, Rick started working for MiningCo. As part of his compensation, Rick received a stock option award last month that has a one year vesting period. Rick is a member of MiningCo'.s DPSP which has the maximum vesting period. He makes the maximum contribution to the group RRSP each month. Rick recently accepted a new position with another company and has submitted his resignation to MiningCo. Rick wants to review his changing financial situation and start an education savings plan for his daughter, Sophie, age 17. No savings are currently in place for her. In the preparation of a comprehensive financial plan for Rick, which of the following information is most relevant? A) The value of the DPSP. 4 is incorrect. With a two year vesting period, Rick is not entitled to the DPSP value. B) The value of the group RRSP. 4 is correct. There is no vesting requirement for the group RRSP, so this value is relevant for planning purposes. Element of Competency 1.003 - Collection - Fundamental Financial Planning Practices - Identifies information and documentation required to prepare the financial plan Linked Body of Knowledge: 4.9.2. DPSPAttributes, 4.2.1. RRSPAttributes, 6.2.3. RESP Attributes C) Details on the stock option award. 4 is incorrect. There is a one year vesting period for the award, so this option award is not available to him. D) Sophie's CESG carry forward room. 4 is incorrect. At age 17, with no existing RESP in place, Sophie is not eligible for CESG payments. Patrick, a QAFPprofes.sional, recently met with his new dient Sabrina. Which combination of the following is most relevant for Patrick to verify Sabrina's investment knowledge and experience? 1. Sabrina's cash flow statement 2. details of Sabrina's asset holdings 3. copies of Sabrina's stock option grants 4. copies of Sabrina's previous tax returns A) 1 and 2 only 4 is incorrect. Option 1 is incorrect because her cash flow statement will show income and expenses but will not provide information on her investment knowledge and experience. Option 2 is correct because details on Sabrina's assets can indicate her investment experience. Holdings which indude various types of assets and investment derivatives may point to a more experienced investor. B) 1 and 3 only 4 is incorrect. Option 1 is incorrect because her cash flow statement will show income and expenses but will not provide information on her investment knowledge and experience. Option 3 is incorrect because her stock option awards would be part of her compensation and would not necessarily reflect her investment knowledge and experience. C) 2 and 4 only 4 is correct. Option 2 is correct because details on Sabrina's assets can indicate her investment experience. Holdings which include various types of assets and investment derivatives may point to a more experienced investor. Option 4 is c,orrect because the type of investment inrome and possible deductions for limited partnership interest, rental expenses, carrying charges, ABILs, can point to a more sophisticated investor. Element of Competency 1.005 - Collection - Fundamental Financial Planning Practices - Determines the client's level of financial sophistication Linked Body of Knowledge: 2.2.1. Net Worth statement, 2.2.2 Cash Flow Statement; 9.6.1. Inrome Received by Individuals, 9.9.2. Federal Tax Deductions and Credits for Individuals D) 3 and 4 only 4 is incorrect. Option 3 is incorrect because her stock option awards would be part of her c,ompensation and would not necessarily reflect her investment knowledge and experience. Option 4 is c,orrect because the type of investment income and possible deductions for limited partnership interest, rental expenses, carrying charges, ABILs, can point to a more sophisticated investor. Bill has an investment account worth $250,000 that e.arns a 5% annual return. He plans to begin making annual withdrawals of $20,000 starting today. What will the expected balance be in 10 ye.ars time? A) $110,510 4 is incorrect. This calculation uses PV = $230,000 ($250,000 - $20,000). Mode= begin, PV = $230,000, PMT = $20,000, N = 10, I= 5%, solve for FV = $110,510.02. B) $123,088 4 is incorrect. This calculation uses mode = end, and PV = $230,000. Mode = end, PV = $230,000, PMT = $20,000, N = 10, I= 5%s,olve for FV = $123,087.98. C) $143,088 4 is correct. The keystrokes are mode = begin, PV = $250,000, PMT = $20,000, I= 5%, N = 10, solve for FV = $143,087.91. Element of Competency 1.101 - Collection - Financial Management - Collects information regarding client's assets and liabilities Linked Body of Knowledge: 2.1.1. Time Value of Money PS 106 Integrates information and/or analyses into a coherent response or recommendation D) $155,666 4 is incorrect. This calculation uses end mode. Mode = end, PV = $250,000, PMT = $20,000, N = 10, I = 5%, solve for FV = $155,665.81. Barbara's RRSP consists of $40,000 in a Canadian equity mutual fund, $30,000 in common stocks, $14,000 in mortgage-backed securities, and $6,000 in a money market mutual fund. Her TFSA balance is $20,000 which is currently in an S&P inde.x-based ETF. Finally, Barbara's non-registered portfolio consists of $8,000 in a non- redeemable two-ye.ar term deposit, $70,000 in flow-through resource shares and $12,000 in 30-day GICs. Based on these hoklings, Barbara's overall asset allocation is: A) 3% cash, 17% fixed income, 80% equities I. is incorrect. Thisweighting does not include the GICs as cash, but rather as a fixed income asset, resulting in $6,000 cash (3%}, $34,000 in fixed income (17%} and $160,000 in equib·es (80%}. B) 7% cash, 6% fixed income, 87% equities I. is incorrect. Thisweighting has the money market fund and term deposit as cash assets, and the GICs as a fixed income asset, and the mortgage-backed securities as an equity,resulb·ng in $14,000 cash {7%}, S12,000 fixed income (6%} and $174,000 equities (87%). C) 9% cash, 11% fixed income, 80% equities 0 Asset Cash Fixed Income Equities Total RRSP Cdn equity fund 40,000 40,000 RRSP Common stocks 30,000 30,000 RRSP mortgage-backed securities 14,000 RRSP Money mkt Fund 6,000 6,000 TFSA S&P index ETF 20,000 20,000 Non-reg term deposit 8,000 8,000 Flow-through shares 70,000 70,000 GICs 12,000 12,000 Totals 18,000 22,000 160,000 200,000 % of assets 9% 11% 80% 100% Ken, age 38, suffered a spinal cord injury and qualifies for the disability tax credit. Ken owned a two-storey home that he sold last week. He and his wife Cora have made an offer to purchase a wheelchair accessible home. Neither has used the Home Buyers' Plan (HBP) before, but they intend to use it for this purchase. Ken's RRSPis worth $45,000 while Cora has $15,000 in her RRSP. What is the maximum HBP withdrawal amount that they can make? A) $0 4 is incorrect. This amount assumes they are not eligible for the HBP withdrawal since Ken recently owned a home. However, the five year waiting period is waived for disabled persons and their relatives. B) $15,000 4 is incorrect. This amount assumes only Cora is eligible for the HBP. This $15,000 amount is her RRSP value. C) $50,000 4 is correct. The five year waiting period does not apply to disabled persons and their relatives. This amount is the $35,000 maximum from Ken's RRSP plus $15,000 from Cora's RRSP = $50,000 withdrawal amount. Element of Competency 1.107 - Collection - Investment Planning - Identifies current and projected asset and investment cash flows Linked Body of Knowledge: 4.2.4. Home Buyers' Plan (HBP) PS 106 - Integrates information and/or analysis into a coherent response or recommendation D) $60,000 4 is incorrect. This amount is the total combined value of their RRSPs. However, he is limited to a $35,000 withdrawal amount and she only has $15,000 available in her RRSP to use under the HBP. Connie has been working for DrugCo for the past five years. Under DrugCo'.s group benefits plan, Connie has employer-paid LTD coverage which will provide a monthly benefit of 70% of her salary with a 120-day elimination period. Connie also has an individual LTD policy that she purchased eight ye.ars ago which will provide adequate income replacement. It has a 90-day elimination period and a second payor amendment. In the event that Connie becomes disabled and qualifies for LTD benefits: A) receipt of her group LTD benefit will be received tax-free. 4 is incorrect. Since premiums are paid by her employer, the group LTD benefit income will be taxable. B) receipt of EI benefits will fully replace her income until her group benefits begin. 4 is incorrect. EI benefits will only replace a portion of her income. C) her group LTD payment will be reduced by her individual plan benefit amount. 4 is incorrect. With the second payor amendment, her individual DI benefit amount will be reduced and not the group plan amount. D) she will need to ensure adequate resources are available for at least a three-month period. 4 is correct. Since her disability income benefits from her individual policy do not begin until after 90 days, she will need to cover expenses for at least a 3 month period. Element of Competency 1.109 - Collection - Insurance and Risk Management - Collects information regarding client's existing insurance coverage Linked Body of Knowledge: 11.4.1. Disability Insurance; 5.11.3. EI Sickness Benefits Walt was receiving $900 per month in CPP retirement income and $600 per month in OAS income. When he died on June 30th, a lump sum CPPpayment of $2,500 was paid and his employer paid a death benefit of $10,000. His wife Lillian is the sole beneficiary named in Walt's will. Based on these details, what amount will be included on Walt's final tax return? A) $7,900 4 is incorrect. This amount is his CPP retirement income of $5,400 ($900 times 6 months) plus the $2,500 CPP lump sum payment = $7,900. However, the lump sum payment is not taxable to the deceased. Also, this amount has not included his OAS income B) $9,000 4 is correct. This amount is his CPP retirement income of $5,400 ($900 times 6 months) plus his OAS income of $3,600 ($600 times 6 months) = $9,000. The CPP lump sum benefit is taxable to his estate or beneficiaries and the death benefit paid by his employer is not a taxable item. Element of Competency 1.113 - Collection - Tax Planning - s the quantitative information required to create a financial plan - Tax Planning - Collects information to establish dient's current and projected tax position Linked Body of Knowledge: 5.1.4. CPP Retirement Pension Benefits, OAS Pension Benefits, 9.6.8. Non- Taxable Income and Receipts C) $11,500 4 is incorrect. This amount is his CPP retirement income of $5,400 ($900 times 6 months) plus his OAS income of $3,600 ($600 times 6 months) plus the $2,500 CPP lump sum benefit = $11,500. The CPP lump sum benefit is taxable to his estate or beneficiaries. D) $21,500 4 is incorrect. This amount is his CPP retirement income of $5,400 ($900 times 6 months) plus his OAS income of $3,600 ($600 times 6 months) plus the $2,500 CPP lump sum benefit plus the$10,000 death benefit from his employer= $21,500. The CPP lump sum benefit is taxable to his estate or beneficiaries and the death benefit paid by his employer is not a taxable item. Albert, age 68, recently passed away. His wife Gail is the executor appointed in his will. When he died, Albert had a number of bank accounts, a whole life insurance policy with Gail as beneficiary, an annuity with a reducing survivor option for Gail and an RRSP with a spousal beneficiary designation. Which of the following documents will be used to help detail the value of Albert's estate? A copy of Albert's: A) RRSP statement 4 is incorrect. With Gail as the named beneficiary of his RRSP, this acrount will pass directly to her, so its value wilt not be included in his estate. B) annuity application 4 is incorrect. This annuity will rontinue reduced payments to Gail and wilt not form part of his estate. C) bank account statements 4 is correct. These bank accounts are his and their value will be included in his estate assets. Element of Competency 1.119 - Collection - Estate Planning and Legal Aspects - Collects information and documents that impact estate planning strategies Linked Body of Knowledge: 4.2.9. Death of an RRSPAnnuitant,10.5.2. Wills, 10.5.6. Probate D) whole life insurance policy 4 is incorrect. Gail is the named beneficiary so proceeds will be paid directly to her and not form part of his estate. Mike and Usa, both age 35, each earn $60,000 annually, resulting in an effective tax rate of 22%. Neither are members of an RPP. Lisa contributes $1,000 e.ach month to her RRSP, while Mike has no RRSP in place. Their monthly debt payments, which indude their mortgage, credit card debt and car lease payments, total $3,450. Household expenses and food are $900 per month. However, they find they have no available cash at the end of each month. Mike and Lisa would like to save more for their retirement. What is currently the primary obstacle to their goal? Mike and Usa's: A) debt costs 4 is incorrect. They have adequate cash flow to cover debt expenses, so this is not an obstacle for them. After-tax family income is $7,800/month ($120,000 less 22% tax divided by 12) and debt payments are $3,450 per month. Although reduction of debt would improve cash flow, resulting in more money available for savings, this is not an obstacle to funding their retirement savings. B) net income 4 is incorrect. They have after-tax family income of $7,800/month ($120,000 less 22% tax divided by 12) less expenses of $5,350 per month ($1,000 plus $3,450 plus $900) results in surplus cash flow of $2,450 per month. Their net income is adequate to fund additional retirement savings, and is not the obstacle to their goal. C) cash management skills 4 is correct. Based on current after-tax family income of $7,800 per month ($120,000 less 22% tax divided by 12) and $5,350 per month ($1,000 plus $3,450 plus $900) in expenses, they have monthly surplus cash flow of $2,450. They need to review how they manage their cash and personal spending decisions in order to achieve increased retirement savings. Element of Competency 1.201 - Collection - Financial Management - Determines client's experience, attitudes, biases and objectives regarding savings and spending Linked Body of Knowledge: 2.2.2. Cash Flow Statement, 9.3.1. Income Taxes Payable - Individuals D) non-discretionary expenses 4 is incorrect. Non-discretionary expenses total $4,350 per month ($3,450 debt payments plus $900 household and food costs) and can be funded by after-tax family income of $7,800 per month ($120,000 less 22% tax divided by 12), with a remaining amount available for savings. The amount of their non-discretionary expenses is not the obstacle to their goal of increased retirement savings. In reviewing Seymour's financial information, which of the following items could indicate that tax minimization is a planning objective for him? A) a laddered GIC portfolio 4 is incorrect. A laddered GIC portfolio may reduce interest rate risk but it does not offer tax minimization since the interest income is taxed at marginal tax rates. B) a leveraged equity investment portfolio 4 is correct. With a leveraged equity portfolio, Seymour can deduct investment loan interest. Dividend income and capital gains earned on the equities wilt benefit from an overall lower rate of taxation. Element of Competency 1.212 - Collection - Tax Planning - Determines dient's taxation experience, attitudes, biases and objectives Linked Body of Knowledge: 9.6.5. Interest Income Received by Investors, 9.6.10. Capital Gains for Investors, 9.6.12. Dividend Income Received by Investors, 9.9.2. Federal Tax Deductions and Credits for Individuals; 4.2.1. RRSP Attributes, 4.2.2. RRSP Contributions C) a large amount of unused RRSP contribution room 4 is incorrect. A large amount of RRSP carryforward room means available tax contributions and corresponding deductions have not been used. D) a non-registered account holding strip bonds 4 is incorrect. Although it is not paid annually on these bonds, a nominal amount must be reported and taxed each year. This investment does not offer tax minimization since tax is paid before income is received. Leila, age 55, is a vested member of her employer's defined contribution pension plan. Leila has engaged the services of Sylvia, a QAFPprofessional, to review her pension and discus.s retirement planning. Leila's pension account holds the following investments: 40% Canadian equity fund, 40% international equity fund and 20% mortgage fund. What is the most appropriate next step for Sylvia? A) Determine Leila's planned retirement date. 4 is correct. Her retirement objectives need to be c.onfirmed before planning can begin. Element of Competency 1.215 - Collection - Retirement Planning - Determines client's retirement objectives Linked Body of Knowledge: 4.1.1. Foundations of Retirement B) Review Leila's current cash flow expenses. 4 is incorrect. Retirement objectives need to be determined first. Current lifestyle expenses may change as retirement approaches. C) Confirm the amount of Leila's RPP benefit on retirement. 4 is incorrect. As a member of a defined contribution plan, her benefit cannot be confirmed until retirement. D) Recommend an increase to cash and fixed income assets in Leila's RPP. 4 is incorrect. Her retirement objectives and risk tolerance need to be determined before investment rec.ommendations can be made. A number of years ago, Sarah and her brother Jeff inherited their mother's home which is registered to them in joint names with right of survivorship. Sarah has drawn up her own will which indicates that she wants her share of the home to be split evenly between her two adult children. Given these details, which combination of the following applies? 1. If Jeff predeceases Sarah, her interest in the home can later pass to her children. 2. If Sarah predeceases Jeff, her children's use of the home will be decided by Jeff. 3. If Jeff predeceases Sarah, his interest in the home will be handled through his will. 4. If Sarah predeceases Jeff, the home will be an asset subject to probate in her estate. A) 1 and 2 only 4 is correct. Option 1 is correct. The surviving joint owner will have an absolute right to the home. With Jeff's death, Sarah will own the home then and can leave it to her children. Option 2 is correct. Ownership of the home will automatically transfer to Jeff as the surviving joint owner, so her children's use of the home will be up to him as sole owner. Element of Competency 1.218 - Collection - Estate Planning and Legal Aspects - Identifies family dynamics and business relationships that could impact estate planning strategies and objectives Linked Body of Knowledge: 10.5.2. Wills, 10.5.6. Probate, 10.2.1. Personal Property Ownership B) 1 and 4 only 4 is incorrect. Option 1 is correct. The surviving joint owner will have an absolute right to the home. With Jeff's death, Sarah will own the home then and can leave it to her children. Option 4 is incorrect. Since the property is jointly owned, it will directly pass to the surviving owner and not be an estate asset subject to probate on the first death of one of the owners. C) 2 and 3 only 4 is incorrect. Option 2 is correct. Ownership of the home will automatically transfer to Jeff as the surviving joint owner, so her children's use of the home will be up to him as sole owner. Option 3 is incorrect. As the surviving joint owner, the home will pass directly to Sarah and not be an asset of his estate to be handled by his will. D) 3 and 4 only 4 is incorrect. Option 3 is incorrect. As the surviving joint owner, the home will pass directly to Sarah and not be an asset of his estate to be handled by his will. Option 4 is incorrect. Since the property is jointly owned, it will directly pass to the surviving owner and not be an estate asset subject to probate on the first death of one of the owners. Yvette, who earns a salary of $70,000, will be paid a $30,000 bonus at the end of the calendar year. She has $40,000 of unused RRSP contribution room available and has asked her employer to do a direct deposit of this bonus amount to her RRSP to avoid tax withholding. What will be the net impact of these transactions this year? A) an increase to her net worth 4 is correct. Her RRSP will increase by $30,000 with this contribution funded by her bonus payment. Element of Competency 2.002 - Analysis - Fundamental Financial Planning Practices - Considers interrelationships among financial planning areas Linked Body of Knowledge: 9.3.1. Income Taxes Payable - Individuals; 2.2.1. Net Worth Statement, 2.2.2. cash Flow Statement; 4.2.2. RRSP Contributions B) an increase to her net cash flow 4 is incorrect. With a direct transfer of her bonus to her RRSP account, she will not receive this payment into her cash flow. C) a decrease in her taxes payable 4 is incorrect. With the direct transfer, no tax is withheld on the bonus payment, so there will be no refund amount earned on the corresponding RRSP deduction. Taxes payable will remain unchanged with $30,000 of bonus income offset by $30,000 RRSP deduction. D) a decrease to her marginal tax rate 4 is incorrect. Her marginal tax rate will remain the same since additional income of $30,000 is reduced by the $30,000 RRSP deduction, resulting in no change to taxable income and corresponding rates. Michael and Sally have two-year old twin boys and have approached Mark, a QAFPprofessional, to help them save for their education. Michael and Sally would like to pay tuition costs for a university degree for each child. The current cost of a degree is $30,000 and tuition rates are increasing by 4% per year, so they can only imagine how much tuition will be in 15 years when the boys are ready to enrol. With a combined family income of $100,000, the couple has available cash flow to fund an RESP each year. If the plan earns an annual 6% return, what minimum RESP contribution amount needs to be made each year, starting today, to achieve their objective? A) $2,190 4 is incorrect. This amount uses the tuition of $30,000 for only one child, and ignores the CESG. Future cost of $30,000 tuition is $54,028.31, and can be met with annual payments of $2,189.82. B) $3,650 4 is correct. Step 1 - Mode = begin, PV = $60,000 ($30,000 times 2), N = 15, I = 4, PMT = 0, solve for FV = $108,056.61 future cost of tuition. Step 2 - FV = $108,056.61, PV = O, I= 6%, N = 15, solve for PMT = $4,379.63 to fund plan each year. Step 3 - PMT = $4,379.63 will earn 20% CESG, so their required contribution is $4,379.63 divided by 1.20 = $3,649.69. Element of Competency 2.104 -Analysis - Financial Management - Calculates amount required to meet financial management objectives Linked Body of Knowledge: 2.2.2. Time Value of Money; 6.2.4. RESP Contributions C) $3,868 4 is incorrect. This method uses END mode for calculations; however, "starting today indicates BEGIN mode should be used. D) $4,380 4 is incorrect. This amount is the total annual contribution to the plan which includes the CESG payment; however, the question asks for the client's required contribution amount. Karen and George, a married couple both in their early thirties, have three children under the age of five. Both work for a family run business that does not provide a group benefits plan. Their lifestyle still allows them to save $400 every month into a joint savings account. The $23,000 cash balance in this joint account and their home are their total assets. The couple has a $175,000 mortgage on their home which is life insured with the lender. They currently have no consumer debt, no will, and have no other individual insurance. They have never met with a financial planner before and are meeting with Kevin, a QAFP professional, at the insistence of Karen's mother. Which of the following should Kevin address as a priority for Karen and George? A) starting an education savings plan 4 is incorrect. While funding the children's education could be a goal, this is not the first priority. B) considering alternative investments 4 is incorrect. While this might be something the couple wants to consider, they do not have significant asset holdings, and does not represent an immediate risk. C) paying down the mortgage 4 is incorrect. Debt reduction could be appropriate, but this is not a priority. D) establishing an estate plan 4 is correct. Given that the couple has young children, no will and no life insurance, this should be the priority in their planning. Element of Competency 2.001 - Analysis - Fundamental Financial Planning Practices - Analyzes collected information to prioritize the financial planning areas Linked Body of Knowledge: 1.1.1. Financial Planning Profession; 10.5.1. Foundations of Estates; 11.7.1. Foundations of Life Insurance Katrina is meeting with Lou, a QAFPprofessional, to discuss the purchase of permanent life insurance. Both of Katrina's parents died from heart disease and she is worried about her future insurability. Which of the following policy dividend options would be most beneficial for Katrina? A) cash option 4 is incorrect. Dividend amounts can be paid in cash; however, this cash payment when received cannot be used to buy coverage if she is uninsurable. B) accumulation option 4 is incorrect. This option allows dividend values to accumulate with interest as part of the po/icy but does not address her concern about future insurability. C) paid-up addition option 4 is correct. Dividends can be used to purchase additional coverage at standard rates regardless of her health. Element of Competency 2.111 - Analysis - Insurance and Risk Management - Determines characteristics of existing insurance coverage Linked Body of Knowledge: 11.7.2. Life Insurance Contracts PS 102 - Determines relevant information D) premium reduction option 4 is incorrect. Dividend amounts can be used to reduce the premium but will not address her insurability concern. Last year Frank gifted $50,000 in cash each to his wife Ann, to his 16-year-old son Gord, and to his 19-year-old daughter Heather. Ann, Gord and Heather each invested the money in different mutual funds which were sold last week. Ann realized gross capital gains of $10,000. Gord earned $2,000 in interest income and $5,000 in gross capital gains. Heather earned $1,000 in interest income and realized a $2,000 capital loss. As a result of the attribution rules, what amount must Frank include in his taxable income for this year? A) $5,000 4 is incorrect. This $5,000 amount only indudes the taxable capital gain (50% of $10,000 gross gain) earned by Ann. There is attribution of interest income earned by Gord since he is a minor child. B) $7,000 4 is correct. This $7,000 amount includes the taxable capital gain of $5,000 (50% of $10,000 gross gain) earned by Ann and the $2,000 interest income earned by Gord. Heather's investment income is taxable in her hands because she is an adult child. Element of Competency 2.114 - Collection - Tax Planning - Determines tax impact of relevant transactions and events Linked Body of Knowledge: 9.11.1. Income Attribution C) $9,500 4 is incorrect. This $9,500 amount includes the taxable capital gains earned by Ann and Gord (50% of $15,000 = $7,500), as well as Gord's $2,000 interest income. However, there is no attribution of capital gains earned by a minor child. D) $10,500 4 is incorrect. This $10,500 amount includes all of the interest income earned by Gord and Heather ($2,000 plus $1,000 = $3,000) and the taxable capital gains earned by Ann and Gord (50% of $15,000 = $7,500). Attribution does not apply to the income earned by Heather since she is an adult child, or to the capital gains earned by Gord. Josephine wishes to make an RRSP contribution this year to her self-directed plan using shares of a Canadian public company (FMV $14,000). She paid $20,000 for the shares several years ago. This ye.ar Josephine has earned $80,000 of employment income and re.alized gross capital gains of $10,000. She has available RRSP contribution room of $34,000. If Josephine transfers these shares in-kind into her RRSP, she will have: 1. a tax deduction of $14,000. 2. a tax deduction of $20,000. 3. taxable capital gains of $2,000 for this year. 4. taxable capital gains of $5,000 for this year. A) 1 and 3 only 4 is incorrect. Option 1 is correct. Her RRSP contribution is based on the $14,000 FMV of the shares when they are transferred into her RRSP. Option 3 is incorrect. This assumes she can reduce her $5,000 taxable capital gain (50% of $10,000) by a $3,000 net capital loss (50% of $14,000 FMV less $20,000 ACB). Since she still owns the shares, this is a superficial loss, so the capital loss cannot be used to reduce realized capital gains. B) 1 and 4 only 4 is correct. Option 1 is correct. Her RRSP contribution is based on the $14,000 FMV of the shares when they are transferred into her RRSP. This transfer would be done at the shares' FMV. Option 4 is correct. She will report a $5,000 taxable capital gain (50% of $10,000). Since she did not sell the shares, there is no capital loss to offset her realized capital gain. Element of Competency 2.114 - Analysis - Tax Planning - Determines tax impact of relevant transactions and events Linked Body of Knowledge: 4.2.2. RRSP Contributions, 9.6.10. Capital Gains for Investors, 9.6.11. Capital Losses for Investors C) 2 and 3 only 4 is incorrect. Option 2 is incorrect. This amount is the $20,000 ACB of the shares. The RRSPdeduction amount is based on the FMVof the shares at the time of transfer into the RRSP and not the cost. Option 3 is incorrect. This assumes she can reduce her $5,000 taxable capital gain (50% of $10,000) by a $3,000 net capital loss (50% of $14,000 FMV less $20,000 ACB). Since she still owns the shares, this is a superficial loss, so the capital loss cannot be used to reduce realized capital gains. D) 2 and 4 only 4 is incorrect. Option 2 is incorrect. This amount is the $20,000 ACB of the shares. The RRSPdeduction amount is based on the FMVof the shares at the time of transfer into the RRSP and not the cost. Option 4 is correct. She will report a $5,000 taxable capital gain (50% of $10,000). Since she did not sell the shares, there is no capital loss to offset her realized capital gain. Roy, age 48, recently pas.sed away, and is survived by his wife Gloria. Roy has group life insurance of $200,000, with Gloria as the named beneficiary. He also has a $220,000 non-registered portfolio and a $350,000 RRSP with Gloria as the beneficiary on this plan. Their $480,000 home is registered to Roy and Gloria in joint name with right of survivorship. Given these details, what is the value of Roy's estate? A) $220,000 4 is correct. His $220,000 portfolio is in his name, with no beneficiary designation, so this asset will form part of his estate. Element of Competency 2.119 - Analysis - Estate Planning and Legal Aspects - Calculates financial projections in the event of death Linked Body of Knowledge: 4.2.9. Death of an RRSPAnnuitant, 10.2.1. Personal Property Ownership, 10.5.6. Probate B) $420,000 4 is incorrect. This amount includes his $200,000 group life and his $220,000 portfolio. The group life has a beneficiary designation, so it will not form part of his estate, since proceeds will be paid to Gloria. C) $460,000 4 is incorrect. This amount includes his $220,000 portfolio and $240,000 which is half of the value of their home. Since the home is registered in joint name with right of survivorship, the house will pass to Gloria and not form part of his estate. D) $570,000 4 is incorrect. This amount includes the $220,000 portfolio plus the $350,000 RRSP. The RRSP has a beneficiary so these proceeds will pass directly to the beneficiary and not form part of his estate. Harriet, a 75-year-old widow, changed ownership of her home to joint tenancy with her son Mike. Harriet purchased her home several years ago for $250,000. Mike is married and lives in his own principal residence. On Harriet's death: A) her estate will be subject to capital gains tax on the gifted portion of property. 4 is incorrect. There will be no capital gains tax on the gifted portion of the property because this was Harriet's principal residence. B) the value of the home will be subject to probate fees. 4 is incorrect. With joint ownership, the home passes to the other joint owner without being subject to probate. C) any value increase in her half of the property will be taxable. 4 is incorrect. A capital gain on Harriet's portion of the property can be sheltered by her principal residence exemption. D) Mike will be subject to tax if he sells the home for an amount greater than its transfer value. r@ 4 is correct. When Mike sells her house, an increase in value from the time of transfer will result in a capital gain to him on his share on sale. Element of Competency 2.114 - Analysis - Tax Planning - Determines tax impact of relevant transactions and events Linked Body of Knowledge: 4.2.2. RRSP Contributions, 9.6.10. Capital Gains for Investors, 9.6.11. Capital Losses for Investors Adele is purchasing a new car for a total price of $50,000. She is meeting with Neil, a QAFP professional, to discuss financing options. The car dealership is offering Adele a 2.90% fixed interest rate for a six-year term or $10,000 off the total purchase price if she pays cash for the vehide. Adele can get a loan from her bank at a 4.25% fixed interest rate over a six-year term and use these proceeds to pay cash for the car to the dealership. Neil should advise Adele that the: A) monthly payments using the bank Joan will be higher. , is incorrect. Monthly payments if the bank loan is used will be $630.34. The dealer payments would be $757.54 per month. B) total interest amount paid using the bank loan will be lower. , is incorrect. With the bank loan, she will pay interest of $5,384.48. With the dealer financing, she will pay interest costs of $4,542.88. C) total cost for the car will be the same for either financing option. , is incorrect. If she borrows funds from the bank to pay cash for the car, the cost will be$40,000 ($50,000 fess $10,000 off for cash). However, if she finances with the dealership, the cost of the car will be $50,000. Also, the amount of interest paid will vary with the two options. D) total cost for the car will be lower with the bank loan option. , is correct. Using bank loan option, she will pay$45,384.48 over the six-year term. With the dealership finandng, she will pay $54,542.88 over the six-year term. If she uses the bank loan to pay cash for the car, her monthly payments will be$630.34, using Mode = end, PV = $40,000 (50,000 cost less $10,000 off for cash), I= 0.354 (4.25% divided by 12), N = 72 (12 times 6 years), FV = 0, solve for PMT = $630.34, If she uses the dealer finandng, her monthly payments will be 757.54 per month, using Mode= end, PV = $50,000, I= 0,2,42 (2.9% divided by 12),N = 72 (12 times 6 years), FV = 0, solve for PMT = $757.54 Financing Payment per Loan Amount of Interest Total Cost Options month Amount Paid $45,384.48 Bank loan option $630.34 ($630.34 times 72 $40,000 $5,384.48 months) $54,542.88 Dealership $757.54 ($757.54 times 72 $50,000 $4,542.88 financing months) Dean, age 73, continues to run his own incorporated business, earning annual compensation of $90,000 ($56,000 salary and $34,000 dividends) placing him in a 40% marginal tax bracket. His wife Betty, age 68, is retired and receives $15,000 per year in combined CPP and OAS benefits. She plans to start v,ithdrawing income from her RRSPs (her own plan and a spousal plan) at their maturity date. Betty has unused RRSP contribution room of $8,000 v,hile Dean has no unused RRSP contribution room. Based on their income and expenses, they project an annual surplus cash flow of $15,000 for this year. Which combination of the following savings options is most appropriate for Dean and Betty? 1. Dean contributes $10,000 to the spousal RRSP in January. 2. Dean contributes $15,000 to the spousal RRSP in January. 3. They contribute the resulting ta.x savings to Betty's RRSP. 4. They contribute the resulting ta.x savings to Betty's TFSA. A) 1 and 3 only I. is incorrect. Option 1 is co"ect. Dean will have previous year earned income of S56,.000 salary resulting in RRSP contribution room of Sl0,.080. A Sl0,.000 spousal contribub·on will eam tax savings at 40%. Option 3 is incorrect. Based on her current income,. Betty will eam little if anyin tax savings on the RRSP contn·bution. The eventual RRSP withdrawal of this contribution may attract tax at a higher rate than the tax savings earned on the contn·bution into her RRSP. B) 1 and 4 only 0 I. is correct. Option 1 is co"ect. Dean will have previous year earned income of $56,.000 salary resulting in RRSP contribution room of Sl0,.080. A Sl0,.000 spousal contribub·on will eam tax savings at 40%. Option 4 is correct. Tax savings from the spousal RRSP contn·bution should be used to fund her TFSA since there will beno raxconsequences on the withdrawal of these funds. Element of Competency 2.205 - Analysis - Financial Management - Evaluates advanrages and disadvantages of each financial management strategy Linked Body of Knowledge: 9.3.1. Income Taxes Payable - Individuals; 4.2.1. RRSP Attributes, 4.3.1. TFSA Attributes C) 2 and 3 only I. is incorrect. Option 2 is inco"ect. This S15,000 amount is based on earned income of $90,.000; however,. his RRSP contribution room is based on his salary income and not the dividend income. Option 3 is incorrect. Based on her current income, Betty will eamlittle if any in tax savings on the RRSP contribution. The eventual RRSP withdrawal of this contribution may attract tax at a higher rate than the tax savings earned on the contn·bution into her RRSP. 0) 2and 4 only I. is incorrect. Option 2 is inco"ect. This S15,000 amount is based on earned income of $90,.000; however,. his RRSP contribution room is based on his salary income and not the dividend income. Option 4 is correct. Taxsavings from the spousal RRSP contribution should be used to fund her TFSA since there will beno raxconsequences on the withdrawal of these funds. Lorraine, age 70, would like to invest $250,000, Her objectives are a regular income flow and preservation of her capital so that she can leave $250,000 to her adult chiklren. She is in very good health. Which of the following are suitable investments for her? 1. a portfolio of GICs 2. an insured annuity 3. an index-linked GIC 4. a bond fund A) 1 and 2 only I. is correct. Option 1 is correct. A portfolio of GICs woufd provide Lorraine with a regular income flow while preserving capital for her estate. Option 2 is correct. The annuity will provide her with regular income and the insurance policy will provide a death benefit for her children. Element of Competency 2.207 - Analysis - Investment Planning - Considers potential investment planning strategies Linked Body of Knowledge: 8.5.3. Fixed Income,. 8. 7.6. Annuities,. 8. 7.1. Mutual Funds; 11. 7.1. Foundations of Life Insurance 8) 1 and 3 only I. is incorrect. Option 1 is correct. A portfolio of G!Cs woufd provide Lorraine with current income while preserving capital for her est:ate. Option 3 is incorrect. An index-linked GIC woufd not be suitable for Lorraine because it C4nnot provide aregular income Flow. C) 2 and 4 only I. is incorrect. Option 2 is correct. The annuity will provide her withregular income and the insurance policy will provide a death benefit for her children. Option 4 is incorrect. A bond Fund is not guaranteed to provide aregular income flow and the value of units will change with market condib·ons,. so there is no safety of capital. 0) 3 and 4 only I. is incorrect. Option 3 is incorrect. An index-linked GIC woufd not be suitable for Lorraine because it cannot providearegular income flow. Option 4 is incorrect. A bond Fund is not guaranteed to provide a regular income Flow and the value of units will change with market conditions,. so there is no safety of capital. Tom's portfolio consists of 10,000 shares of a Canadian pharmaceutic.al comp.any. Which of the following purchases would be most likely to improve Tom's industry diversification? A) shares of a drug store chain /, is correct. Drug store chains would bein the consumer or rerai/ industry (NYSE puts them in rerai/). They are diversified retailers who sell pharmaceutical products, but are more affected by consumer and retail trends. Element of Competency: 2.207 - Analysis - Investment Planning - Considers potential investment planning strategies Linked Body of Knowledge: 8.6.1. Asset Allocation 8) shares of a pharmaceutical dtStributor /, is incorrect. Development and distribution are different stages in the pharmaceutical industry. C) shares of a foreign pharmaceutical firm /, is incorrect. This is an example of geographical diversification that does not achieve industry diversification. 0) bonds of a pharmaceutic.al company /, is incorrect. This is an example of asset class diversificab·on that does not achieve industry diversification. Andy and Ellen have asked Peter, a QAFP professional, to provide advice about life insurance options. The couple just bought a new house for $400,000 and assumed a $300,000 mortgage. Andy has basic group coverage at work of two times his salary of $80,000. Ellen is currently on maternity leave and planning to be a stay-at-home parent for their baby girl. With reduced family income and new expenses, the couple's cash flow is very tight. Which of the folk>wing insurance options would be most suitable for Andy and Ellen? The purchase of: A) a joint last-to-die policy /, is incorrect. Funds would need to be available on first death to pay debt and replace income. B) individual term lrfe policies /, is correct. They have limited funds and both would need adequate coverage for debt reduction,. income replacement or child care costs. Individual term policies can be purchased to meet each of their needs at a cheaper price than other options. Element of Competency 2.210 - Analysis - Insurance and Risk Management - Considers potential risk management strategies Linked Body of Knowledge: 11.7.1. Foundations of Life Insurance C) a small whole life policy v,ith a term rider /, is incorrect. A whole life policy would be more expensive than a term policy and their cash Flow is tight. 0) additional group coverage with Andy's employer /, is incorrect. Although group coverage may be more affordable,. it is tied to his employment and may not provide an adequate amount For coverage on his wife. Hank and Maggie, both age 52, are reviewing their estate planning. Hank is an executive at a privately-owned small tech company and ovms $100,000 of shares in his employer's company (ACS $20,000). Maggie works for a not-for-profit firm. The couple ovms their $1.2 million home, their $400,000 chalet (ACS $200,000) and has no debt. Hank and Maggie have mirror wills calling for an outright distribution to the surviving spouse on first death, then to their adult children upon the survivor's death. The couple would like the full value of their assets to transfer to their children. Based on current values and assuming a ta.x rate at death of 35%, which of the following life insurance options would best meet the couple's objective? A) individual term policies for $35,000 on Maggie and $49,000 on Hank with the children as named beneficiaries I. is incorrect. The S35,.000 on Maggie covers the capital gains tax on the cottage and the $49,000 on Hank covers the capital gains rax on the cottage and his com ny shares. However, spousal rollovers can occur on first death, so individual policies are net required. Term policies will net be in effect for their lifetimes. Also, with the children as beneficiaries, funding to pay the income tax may not be available. B) a joint first-to-die policy for $49,000 with the children named as beneficiaries I. is incorrect. This amount will cover the capital gains rax on the cottage and his shares {35% tax on $140,000 taxable capital gains = $49,000). However, insurance funding is notrequired on first death to pay for the income tax since spousal rollover provisions can defer the capital gain tax to second death. Also, with the children as beneficiaries, funding to y t hi n ce o m e tax may not be available. C) a permanent policy for $49,000 on Hank with Maggie named as the beneficiary I. is incorrect. A permanent policy on Hank will provide a benefit for his lifetime and it will payout if he predeceases Maggie. However, funding to y t hi n ce o m e tax will berequired on second death when there will beno spousal rollover available. 0) a joint last-to-die policy for $49,000 with the estate named as beneficiary 0 I. is correct. A joint last-to-die willyout onsecond death when the capital gains tax will bedue. This amount will cover the capital gains tax on the cottage and his shares (35% tax on $140,000 taxable capital gains = $49,000). Also, with the estate as beneficiary, funds will be there for the executor to pay the income tax. Renee is a recent widow with twin boys, age 7. Her late husband Larry is named as the beneficiary of her life insurance policy and her RRSP. Renee's estate objective is to leave her estate to her children and have her sister Carol manage it until her children reach the age 21. To meet her estate objectives, which of the following should Renee implement? Change the: 1. life insurance beneficiary to her children. 2. life insurance beneficiary to her estate. 3. RRSP beneficiary to her estate. 4. RRSP beneficiary to Carol, A) 1 and 3 only L is incorrect. Option 1 is inco"ect. With life insurance proceedsid t o t hc e h i l d r e n , funds would be held in trust and managed by provincial authorities until their age of majority which is an earlier distribution date than Renee wishes. Since the life insurance did not form part of the est:ate, Carol would not be trustee of these proceeds. Option3 is correct. With the estate as beneficiary, RRSP proceeds could be held in trust and managed by Carol until the specified distribution date. 8) 1 and 4 only L is incorrect. Option 1 is inco"ect. With life insurance proceedsid t o t h e children, funds would be held in trust and managed by provincial authorities until their age of majority which is an earlier distribution date than Renee wishes. Since the life insurance did not form part of the est:ate, Carol would not be trustee of these proceeds. Option 4 is incorrect. With Carol as beneficiary, there is no guarantee that these funds would be available to the boys when theyreached the age of majority. C) 2 and 3 only 0 L is correct. Option 2 is correct. With life insurance paid to the est:ate, Carol could manage the funds as trustee until paid out to her sons at the age 21. Option3 is correct. With the estate as beneficiary, RRSP proceeds could be held in trust and managed by Carol until the specified distribution date. Element of Competency 2.224 - Analysis - Estate Planning and Legal Aspects - Considers potential estate planning vehicles Linked Body of Knowledge: 4.2.9. Death of an RRSP Annuitant, 10.5.2. Wills, 11.7.2. Life Insurance Contracts 0) 2 and 4 only L is incorrect. Option 2 is co"ect. With life insurance paid to the estate, Carol could manage the funds as trustee until paid out to her sons at the age 21. Option 4 is incorrect. With Carol as beneficiary, there is no guarantee that these funds would be available to the boys when they reached the age of majority. Carrie, age 47, is a single parent. Her onty son Daniel, age 25, has been diagnosed with a mental illness and qualifies for the disability tax credit. He is financialty dependent on Carrie. She is working with Stan, a QAFP professional, to help ensure that Daniel is financialty secure should she die prematurely. Carrie has $80,000 in a TFSA and $240,000 in RRSPs. Over the years she has contributed $120,000 to an ROSP (FMV $300,000) for Daniel. She has surplus cash flow of $1,000 per month from her full-time employment income once family expenses are paid. Which of the following options woukl best meet Carrie's estate planning objective? A) Purchase a life insurance policy with a lifeinsurance trust as beneficiary, 0 L is correct. The purchase of a life insurance policy can provide a lump sum payment to provide income for his lifetime in the event of her premature death. With a life insurance trust asnamed beneficiary, the proceeds can be managed professionalfy and used to provide for him during his lifetime. Element of Competency 2.224 - Analysis - Estate Planning and Legal Aspects - Considers potential estate planning strategies Linked Body of Knowledge: 11.7.1. Foundations of Life Insurance, 11.7.2. Life Insurance Contracts, 6.4.2. RDSP Contribub·ons 8) Direct her monthly surplus cash flow to fund a new TFSA for Daniel. L is incorrect. Although this will provide savings for Daniel, it is unlikely that this level of funding can provide Financial security for him if she should die prematurely. Also, it is not known if he can handle assets of his own. C) Name Daniel as the beneficiary of both her TFSA and RRSP. L is incorrect. This will ensure herregistered plans go directly to him but it will notensure his Financial security if she should die prematurely. Also, it is not known if assets should go directly to Daniel for him to manage to provjde adequate income for his lifetime. 0) UseherTFSA balance to contribute to the ROSP. L is incorrect. Although this would maximize contn·butions to his RDSP, this does not ensure his future Financial secun·ty if she should die prematurely. Christina, a QAFP professional, prepared a financial planning report for her clients, Eric and Marlene. She noticed that Eric has a $10,000 term deposit coming due next month that can be reinvested to earn 5% interest in a different fixed income investment. Eric is in a 45% marginal tax bracket, and Marlene has no taxable income. The couple's mortgage carries.an interest r.ate of 4%.and is due for renewal ne.xt month at the same rate. Eric has an investment loan at 6% that v,as used to purchase common shares. Given this information, the best recommendation for Christina to make is to: A) reduce the mortgage by $10,000, 0 L is correct. The mortgage at 4% is Eric's more expensive debt since it is not deductible and should be reduced. Hisafter-taxreturn on the term deposit is 2.75% (5% less 45% tax)while the mortgage is costing him 4%. Mortgage reduction could occur on renewal without penalty. Element of Competency 3.101 - Recommendation - Financial Management - Formulates financial management strategies Linked Body of Knowledge: 3.3.1. Terms of Credit; 9.3.1. Income Taxes payable - Individuals,. 9.9.2. Federal Tax Deductions and C.redits for Individuals, 9.11.1. Income Attn·bution 8) reduce the investment loan by $10,000, L is incorrect. The interest on the investment loan is tax-deductible. The a er-tax cost of this loan would be3.30% (6% less 45% tax); which is less expensive than the 4% mortgage. C) reinvest the $10,000 in Eric's name to earn 5%. L is incorrect. Reinvesting to eam a 2.75% (5% less 45% tax) after-taxreturn is not the best use of cash when Eric,.s debt obligations are costing him more than he is earning. 0) reinvest the $10,000 in Marlene's name to earn 5%. L is incorrect. Income attribution would result if the term deposit is invested in Marleoe,.s name. With attn·bution,. the interest income would betaxable to Eric. His after-tax return of 2.75% (5% less 45% tax) would beless than the cost of his debt. Glenn plans to purchase a $200,000 vacation property for family use. OJrrently, he has no debt but wants to arrange the most cost-efficient financing for this purchase. His home is worth $500,000, his non-registered equity portfolio (ACB $248,000) has a FJ.1V of $250,000 and his self-directed RRSP has a vatue of $350,000. Glenn also owns a rental property worth $400,000. Which of the following financing options woukl best meet Glenn's objective? A) Arrange a mortgage on his rental property, I. is incorrect. With this option there will be the cost of non-deductible mortgage interest. Even though secured by an investment asset., the mortgage interest is not deductible since proceeds were used to purchase personal use property. It is the use of the proceeds, not the underlying security which determine the interest deductibility of the loan. 8) Establish a personal line of credit secured by his home. I. is incorrect. There will beappraisal fees and legal costs in setting up a secured line of credit. Also., interest on the line of credit used For the family property purchase will not betax deductible. C) Sell a portion of his RRSP investments to hold a mortgage v,ithin his RRSP. I. is incorrect. The mortgage has to be inwred., plus there are other fees involved with hokling a mortgage within your RRSP. This option can be costly. 0) Liquidate a portion of his equity portfolio using proceeds to purchase the vacation property, 0 I. is correct. With this option, Funds will beavailable with no legal or interest costs. He can later borrow Funds to purchase equities which would provide a deductible interest expense since the use of the loan is for investment purposes. Bette, a QAFP professional and portfolio manager, uses a tactical asset allocation approach, Which of thee following practices -,ould Bette follow in her approach? 1. Underweight tfie fixed income asset class \-..,hen interest:rates are expected to decline. 2. Underweight the US foreign asset class ,,hen thee Canadian dollar is expected to appreciate against the US dollar. 3, Oven\feight cash when the economy is entering a recession. 4, Oven\feight the fixed income asset class when inflation is rising, A) 1 and 2 only l is ;ncorrect. Option 1 is ;ncorrect. Tne fixed ;ncome asset class should be overweighted when ;nterest rates are expected to decfine to take advantage of higher bond prices, boosting portfolio returns. Option 2 is correct. When the Canadian do/Jar is expected to appreciate against the US do/Jar, any US assets will dee.line in value, so underwe;ghting the US asset class ;s an appropn·ate tactical move. B) 1 and 4 only L is incorrect. Option 1 is incorrect. The fixed income asset class should be overweighted when interest rates are expected to decfine to take advantage of higher bond prices, boosting portfolio returns. Option 4 is incorrect.. \-Vith an increase in inflation, fixed income vehic{es should be underweighted. An increase in inflation is followed by an increase in interest rates which feads to declining bond values. C) 2 and 3 only is corract. Option 2 is correct. When the Canadian dollar is expected to appreciate against the US dollar, any US assets will decline in value, so underweighang the US asset class is an appropriate tactical move. Option 3 is correct Oven,ve.ighting cash when the economy is entering a recession is an appropriate t.acticaf move. Equity vafues decline in a recession, so a cash position will provide capital preservation. Alan is the sole shareholder of Mid Base Inc., a small business corporation with annual active business income of $200,000. Mid Base Inc. pays Alan's annual compensation of $150,000, consisting of salary and bonus. To meet his risk management needs, Alan plans to purchase a $750,000 term life policy that carries an annual premium cost of $4,000. Alan's will leaves everything to his wife Dominique. Which combination of the foUov,ing presents the most tax-efficient options for the purchase of this coverage? 1. Have Alan ovm the policy and pay the premiums. 2. Have Mid Base Inc. own the policy and pay the premiums. 3. Name Dominique as the policy beneficiary. 4. Name Mid Base Inc. as the policy beneficiary. A) 1 and 3 only /, is incorrect. Option 1 is inco"ect. Based on his current income, Alan is in the top marginal taxrate. The company would be taxed at the much lower small business tax rate. A higher amount of gross income isrequired by Alan to p.ay the premium using a er-tax dollars than by the comp.any. Option 3 is incorrect. If Dominique is the benefidary, premiums p.aid by the comp.any would be a taxable benefit to Afan. This option does not provide the most tax-efficiency. B) 1 and 4 only /, is incorrect. Option 1 is inco"ect. Based on his current income, Alan is in the top marginal taxrate. Thecompany would be taxed at the much lower small business tax rate. A higher amount of gross income isrequired by Alan to p.ay the premium using a er-tax dollars than by the comp.any. Option 4 is correct. If the company is the beneficiary, then premiums paid by the company would not be a taxable benefit to Alan. The benefit can be paid out tax-Free through the Capital Dividend Account. C) 2 and 3 only /, is incorrect. Option 2 is co"ect. Since the company would pay tax at the lower small business taxrate compared to Alan's high marginal taxrate, more a er-tax income will beavailable in the company to pay the premiums. Option 3 is inco"ect. If Dominique is the beneficiary, premiums p.aid by the company would be a taxable benefit to Alan. This option does not provide the most tax-efficiency. 0) 2 and 4 only 0 /, is correct. Option 2 is correct. Since the company would pay tax at the lower small business tax rate compared to Alan's high marginal taxrate, more a er-tax income will beavailable in the company to pay the premiums. Option 4 is co"ect. If the company is the beneficiary, then premiums paid by the company would not be a taxable benefit to Alan. The benefit can be p.aid out tax-free through the Capital Dividend Account. Mary-Ann, age 60, plans to retire this year. She and her husband Wayne, age 66, have approached David, a QAFP professional, to review her payment options from her defined contribution RPP. Wayne is already retired and receives $85,000 in annual indexed pension income which meets their lifestyle needs. They have no savings aside from their pension plans, Wayne v,ants to have financial flexibility in the event of an unforeseen circumstance, and Mary-Ann v,ants to ensure that their adult son Jim would receive financial support should they pre-decease him, Which of the foUov,ing options would best meet their objectives? A) Transfer the RPP plan balance into a URA for Mary-Ann. Cl I. is correct. With this option, a portion of capital will be available to meet their needs and can be passed along to her son. Element of Competency 3.114 - Recommendation - Retirement Planning - Recommends optimal retirement planning strategies Linked Technical Knowledge: 4.5.4. DBPension Plan Transfers., 4.11.1. Locked-In Retirement Savings Vehicles Attributes., 4.14.1. Annuities 8) Select a joint life annuity v,ith a level survivor benefit for Wayne. I. is incorrect. This option will provide level income during their lifetimes but will not provide For their son. C) Open an RRSP for Mary-Ann, transferring the RPP plan balance into it. I. is incorrect. The RPP cannot be transferred to her RRSP., it can go to a LIRA or be used to purchase an annuity. 0) Purchase a single life annuity with a 10-year guarantee, naming Jim as contingent beneficiary, I. is incorrect. This option will not provide any access to capital to meet Wayne.,s objective. If shedies a er theguarantee period., no survivor income will bepaid to her son. Maud, age 58 and a re-cent v,idow, is reviewing her estate plan. She has group life insurance of two times her $90,000 salary and is a member of the RPP. Pete, her deceased husband, is the named beneficiary on all of her group plan-s. Her only debt is a $38,000 mortgage. Maud and Pete revised and executed their wills last year, naming each other as primary beneficiary and their adult children as contingent benefteiaries. They also had powers of attorney put in place, appointing each other. Which of the following is the most immediate planning priority for Maud? A) executing a new will I. is incorrect. Maud still has a valid will which wasrecently revised. This is not an immediate priority. 8) purchasing mortgage insurance I. is incorrect. Maud's group coverage is adequate to pay off the mortgage. There is no indication that additional coverage is required, so this is not an immediate concern. C) revising her power of attomey Cl I. is correct. She needs torevise this document to appoint a new attorney(s). Element of Competency 3.120 - Recommendation - Estate Planning and Legal Aspects - Priodtizes steps to assist client in implementing legal measures Linked Technical Knowledge: 10.5.2. Wills, 10.7. Powers of Attorney 0) changing the beneficiary on her group plans I. is incorrect. With the existing benefidary deceased these assets would be paid to her estate and distributed according to her will. This is not an immediate priority. CASE 1 Martin, age 59, and his wife Adele, age 56, are meeting v1ith Scott, a QAFP professional, to review their retirement plan. It was three years ago when Martin was injured in a car accident and unable to work for a year. Ou ring that same time, the couple lost a significant amount of money on a speculative investment and had to use their savings to cover expenses. With his improved health, Martin has been able to return to full-time employment, The couple is now focused on building their retirement savings to help ensure a comfortable retirement. Martin and Adele have two daughters, Sophia and Lena, who live at home with them and are both attending university, The couple pays $12,000 per year towards their daughters' tuitions ($6,000 for each child) and expects to do so for two more years. The girls each earn approximately $10,000 annualty from their part-time jobs and use this income to cover their other costs. Martin is an executive earning a salary of $130,000, resulting in a 30% effective tax rate and placing him in a 45% marginal tax bracket. Under his employer's group benefit plan, he has life insurance coverage of two times salary and LTD insurance but no retirement plan savings, Several years ago, Adele started a wedding cake business which she continues to run as a sole proprietor from home. She earns approximatety $40,000 in net income per year, paying tax at a 17% effective rate and placing her in a 25% marginal tax rate. The couple would like to discuss the best v,ay to structure Adele's business to take advantage of any tax planning options, Martin and Adele paid off the mortgage on their home (FMV $600,000) ten years ago. However, in an effort to boost their savings, Martin arranged a $200,000 mortgage on their home to buy a resource-based investment five years ago. Unfortunatety, the investment did not perform as expected and he sold it for $40,000 two years ago. The mortgage on their home carries a 4% interest rate, has a monthly payment of $1,100 and a current balance of $160,000, It is up for renewal next year. The couple contributes the maximum amount to their RRSPs each year January and plans to continue to do so until they retire, Martin has $198,500 in his RRSP, while Adele has $72,000 in her RRSP, Their RRSPs are invested 20% in cash and short-term foced income assets and 80% in preferred shares and large cap equities and have earned an average annual rate of 3%, They have no unused RRSP deduction room. Martin and Adele have an after-tax family income of $9,600 per month, In addition to their mortgage payment, education funding and their RRSP contributions, they pay $4,000 per month in household and personal expenses. The couple plans to retire when Martin tums age 65 and estimates they will need gross income during retirement of $4,000 per month, Given their family health histories, both Martin and Adele expect to live to age 90, Martin will qualify for a CPP monthly benefit of $1,100 at age 65. Adele will receive a CPP benefit of $645 at age 65 based on her continued payment of premiums at the current level, They would each be eligible for an OAS benefit of $6,88 per month, Scott advised that they likely would pay income tax at a 15% effective tax rate once retired. Based on their current funding and expense amounts, what will beMartin and Adele's annual cash flow position for this year? An annual surplus of: A) S11,400 0 I. is correct. This amount uses their combined t:ake-home income of $115,200 ($9,600 times 12) less $30,600 RRSP contributions (18% of $130,000 and $40,000) less S12,000 educab·on amount less $13,200 mortgage ($1,100 times 12) fess $48,000 household and personal expenses ($4,000 times 12) = $11,400. Element of Competency 1.103 - Collection - Anancial Management - Prepares statements of client's net worth and cash Flow Linked Body of Knowledge: 2.2.2. Cash Flow Statement B) $23,400 I. is incorrect. This amount has not included their education Funding of $12,000. Their combined take- home income of $115,200 ($9,600 times 12) less $30,600 RRSP contn·butions (18% of $130,000 and $40,000) less $13,200 mortgage ($1,100 Umes 12) less $48,000 ($4,000 times 12) household and personal expenses = $23,400. C) $24,600 I. is incorrect. This amount has not included their $13,200 annual mortgage payment ($1,100 times 12). Their combined take-home income of $115,200 (S9,600 times 12) fess $30,600 RRSP contributions (18% of S130,000 and $40,000) less $12,000 education amount fess $48,000 household and personal expenses (S4,000 times 12) = $24,600. 0) $42,000 I. is incorrect. This amount has not included their $30,600 RRSP contributions. Their combined t:ake-home income of S115,200 ($9,600 times 12) less $12,000 educab·on amount less $13,200 mortgage ($1,100 times 12) less S48,000 household and personal expenses (S4,000 times 12) = $11,400 = $42,000. If Martin and Adele retire on their planned date and elect to receive all available government pension amounts then, what will be their combined monthly pension income from government sources when they retire? A) S2,294 0 L is correct. This amount includes S1,100 Marb·n's CPP at age 65 plus S688 Martin's OAS at age 65 plus $505.68 Adele's CPP at age 62 ($645reduced by 21.6% (7.2% b·mes 3 years)) = $2,293.68 per month. Element of Competency 1.116 - Collection - Retirement Planning - Collects informationregarding clienes potential sources of retirement jncome Linked Body of Knowledge: 5.1.4. CPP Retirement Pension Benefits, 5.5.2. OASPension Eligibility B) $2,433 L is incorrect. This amount has not reduced Adele's CPP income For receipt at her age 63. S1,100 Martin's CPP at age 65 plus $688 Martin's OAS at age 65 plus S645 Adele's unreduced CPP = $2,433 per month. C) $2,982 L is incorrect. This amount has includedreceipt of OASFor Adele; however, she is not eligible to receive it until age 65. $1,100rtin's CPP at age 65 plus $688rtin's OAa Stag6e 5, S505.68 Adele's CPP at age 62 (S645 reduced by 21.6% (7.2% times 3 years) plus $688 Adele's OAS= $2,981.68 per month. 0) $3,121 L is incorrect. This amount has not reduced Adele's CPP income For receipt at her age 63 and included an OAS benefit For her which woufd not be paid until age 65. S1,100 Martin's CPP at age 65 plus S688 Martin's OAS at age 65 plus S645 Adele's unreduced CPP plus S688 Adele's OAS= S3,121 per month. In reviev,ing Martin and Adele's RRSP holdings, which appears to be their primary investment objective? A) growth I. is incorrect. With 80% of their investments in preferred and large cap shares, growth is likely not their primary objective. Investment growth can bebetter achieved with common shares and lower cap companies looking to expand their business. B) income I. is correct. The preferred shares wouldya s e d i vti d e n d and typically large cap shares provide consistent dividend income. Element of Competency 1.204 - Colfection - Investment Planning - Determines client's investment experience, attitudes, biases and objectives Linked Sedy of Knowledge: 8.3.1. Investment Objectives and Constraints, 8.5. Asset Classes C) liquidity I. is incorrect. With only 20% of their RRSPs in cash and short-term fixed income, liquidity does not appear tc be the primary investment objective. 0) capital preservation I. is incorrect. Secun·ty of capital is not provided with preferred and large cap equities. With 80% of their holdings in equities, capital preservation is not their primary investment objective. Based on Martin and Adele's current income amounts, v,hat v,ill be the combined value of their RRSPs on their planned retirement date? A) $322,991 I. is incorrect. This amount has ignored their planned continued contributions to their RRSPs. Mode = begin, PV = S270,500 ($198,500 plus S72,000}; N = 6 years (to his age 65), I= 3, PMT = 0, solve for FV = S322,991.15. B) $478,893 I. is incorrect. This amount has ignored Future RRSP contributions from Adele to her RRSP and used another contn·bution to Martin's RRSP for this year. Mode = begin., PV = $270.,500 ($198,500 plus $72.,000), N = 6 years (to his age 65), I= 3, PMT = S23,400 (18% of S130.,000), solve For FV = $478,892.76. C) $490,324 0 I. is correct. The combined value of their RRSPs is S270,500 ($198.,500 plus S72,000) and they have made their RRSP contn·bution for this year. S270.,500 eaming 3% = $278.,615 value next year when Martin is age 60. Mode = begin, PV = $278,615., N = 5 years (to his age 65), I= 3, PMT = $30,600 (18% of S130.,000 and $40,000), solve for FV = $490.,234.49. Element of Competency 2.117 - Analysis - Retirement Planning - Calculates financial projections based on current position Linked Body of Knowledge: 2.1.1. Time Value of Money, 4.2.2. RRSP Contributions 0) $526,862 I. is incorrect. This amount has added another RRSP contn·bution for the current year. Mode = begin, PV = $270.,500 ($198,500 plus $72.,000), N = 6 years (to his age 65), I= 3, PMT = $30,600 (18% of $130,000 and S40,000)., solve For FV = S526,862.49. Which of the following ta.x planning options is most appropriate for Martin to do this year? A) Claim the non-refundable spousal tax credit, I. is incorrect. Adele's income is too high to claim any of the non-refundable spousal tax credit. This claim would be available if her income was below the basic personal tax credit amount. 8) Carry forward a portion of his available RRSP deduction. I. is incorrect. He is in a high marginal taxrate andcanreceive tax savings Nsed on this high rate. Claiming the Full deduction amount for his contribub·on will not result in a lower marginal tax bracket for him which would reduce the amount of tax savings he would eam on his RRSP contn·bution. There is no benefit to defer a portion of his available RRSP deduction amount. C) Usea $10,000 tuition amount to claim the education tax credit, 0 I. is correct. Based on their low incomes,. his daughters are able to transfer a maximum amount SS,000 each of tuition expense to Martin and he can claim the education tax credit on these transferred amounts. Element of Competency 2.214 - Analysis - Tax Planning - Cons;ders potential tax planning strategies Linked Body of Knowledge: 4.2.2. RRSP Contributions, 9.9.2. Federal Tax Deductions and Credits for Individuals 0) Deduct the interest portion of the $13,200 annual mortgage payment, I. is incorrect. With the underlying investment now scld, the mortgage is no fcnger a source of deductible debt. If, in addition to their CPP and OAS income, Martin and Adele require another $2,000 at the beginning of each month to cover retirement expenses and withdraw this amount from their RRSPs for the duration of their expected retirement planning period, what combined value do their RRSPs need to be upon their retirement to meet their objectives? A) $422,807 I. is incorrect. This amount uses a planning pen·od of 25 years based on Martin's age when they retire and ignores the tax due on the RRSP withdrawal. Mode = begin, FV = 0, N = 300 (25 years times 12), PMT = S2,000, I = 0.25% (3% divided by 12), solve for PV = $422,807.29. B) $455,405 I. is incorrect. This amount ignores the t:ax dve on the RRSP withdrawal. Mode = begin, FV = 0, N = 336 (28 years times 12), PMT = $2,000, I= 0.25% (3% divided by 12), solve for PV = S455,405.03. C) $497,420 I. is incorrect. This amount uses a planning pen·od of 25 years based on Martin's age when they retire. Based on an expected effective tax rate of 15%, they wilf need to withdraw $2,352.94 (S2,000 divided by 0.85) from RRSPs each month to fund S2,000 of expenses. Mode = begin, FV = 0, N = 300 (25 years times 12), PMT = $2,352.94 ($2,000 divided by.85), I= 0.25% (3% divided by 12), solve for PV = $497,420.09 D) S535,771 0 I. is correct. They both plan to live to age 90 and Adele will beage62 when theyretire sothisresults in a planning period of 28 years. Based on an expected effective tax rate of 15%, they will need to withdraw $2,352.94 ($2,000 divided by 0.85) from RRSPs each month to fund S2,000 of expenses. Mode = begin, FV = 0, N = 336 (28 years times 12), PMT = $2,352.94 ($2,000 divided by.85), I= 0.25% (3% divided by 12), solve for PV = $535,770.63. Adele asks Scott about the most suitable business structure for her cake decorating business. Which of the following is the most appropriate recommendation for Scott to make? A) Suggest Adele create a holding company with she and Martin as shareholders. I. is incorrect. Based on her current level of taxable income; she is p.aying tax at low effective tax rate now; so there is no immediate need to use a holding company for any tax planning strategies. This may be out of scope for Scott as a QAFP professional and he should refer her to another qualified professional; such as an accountant. B) Refer Adele to an accountant to discuss the available options with her, I. is correct. This assessment is likely out of scope for a QAFP professional. The most appropriate recommendation is to refer her to another qualified professional such as an accountant. Element of Competency 3.003 - Recommendation - Fundamental Financial Planning Practices - Determines other professionals required to assist in implementation of the financial plan Rule 25 - A Certificant shall offer advice only in those areas in which the Certificant is competent. C) Recommend Adele establish a partnership v,ith Sophia and Lena. I. is incorrect. There is no indication that she wants to go into business with her daughters and her income is needed to Fund the couple's household expenses. This may be out of scope For Scott asa QAFP professional and he should refer her to another qualified professional; such as an account:ant. 0) Advise Adele to incorporate the business as sole sharehokler. I. is incorrect. Based on her current level of taxable income; she is p.aying tax at low effective tax rate now; so there is no immediate need to use a company For any tax planning strategies. This may be out of scope for Scott as a QAFP professional and he should refer her to another qualified professional; such as an accountant. CASE 2 Mark's wife Donna unexpectedly passed away last month at the age of 35, Donna was a stay-at-home parent and handled all the household finances and responsibilities. Now the sole parent of three children, ages six, seven and nine years old, Mark needs to review the famity situation given their recent loss and is working with Tina, a QAFP professional, Mark, age 38, has focused a lot of his time over the last few years on his career. He is concemed about his ability to take care of his children v,hile continuing to earn his six-figure income, His employer is letting him work from home a few days a week pending the arrangement of a more suitable child care option. Mark feels his best solution v,ill be to hire a nanny at an estimated cost of $18,000 per year, Mark, an executive at Energy Solutions Inc, (ESI), eams a salary of $110,000, resulting in a 30% effective tax rate and a 40% marginal tax bracket for him, Two years ago, Mark was given a stock option award for 2,000 ESJ shares at an exercise price of $10 per share which equalled the share's FMV at time of the option's issue, ESJ is a public company and its shares are currently trading at $25. Mark is very optimistic about ESI's continued growth, ESJ's group benefits include life and disability insurance as well as dent.al and health care, Mark has the basic group life insurance coverage of two times salary. The company's group LTD plan is employee-paid and covers 67% of salary to a maximum benefit of $4,500 per month with a 90-day elimination period. ESJ provides a group RRSP for its employees. The employee contributions are made through payroll, to a maximum of 5% of salary each year, and matched dollar for dollar by ESI. Mark makes the maximum matching group RRSP contribution each year, His group RRSP (FMV $79,200) holds an equity growth fund, precious metal fund and oil and gas fund, Mark contributed $6,000 this year to Donna's spousal RRSP (FMV $55,280). Mark has $31,600 and Donna has $7,200 of available RRSP contribution room. Spousal beneficiary designations are on all their registered plans. Mark and Donna have a joint account v,ith $5,000 and joint savings of $10,000 invested in a redeemable one-year GJC at 2%. They each have $50,000 invested in short term deposits in a TFSA with available unused contribution room. Mark's non-registered investment account holds 1,000 shares of Western Drilling Corporation (WOC), (FMV of $8,000) which he purchased four years ago for $30,000 based on a stock tip from a friend, Mark is looking for the big returns to improve his net worth position, With his steady salary income, he feels he can take risks even though he prefers not to have investment losses. Their family home (FMV $300,000) is registered in joint names with right of survivorship. Their $125,000 mortgage carries a 3.25% foced interest rate and is due for renewal ne.xt year. Neither Mark nor Donna liked having much debt. In addition to their mortgage, there is a secured line of credit with $70,000 limit and a zero balance and a $30,000 open car loan at a 2% interest rate. After tax and other payroll deductions, Mark's monthly take home pay is $5,700 v,hich was adequate to meet previous famity expenses of $4,700 per month, The couple do not have any v,ills or powers of attorney in place. In the event of his death, Mark would like to ensure that all debts are paid and his family would receive the annual after-tax amount of his current salary each year until his youngest child turns age 25, without selling their home or using registered assets. Mark has a $200,000 term life policy through his alumni association, v,ith Donna named as the beneficiary, He recently pre- paid $20,000 towards his own funeral arrangements, One of the couple's goals v,as to start saving for their children's education. During their meeting, Mark mentioned to Tina that he and the children are trying to adjust to this new situation, but it v,ill certainty take some time, Tina realizes that the recent events have brought signifteant changes to Mark's life and several planning issues that should be addressed soon, After reviev,ing Mark's investment holdings, which of the following is the most appropriate next step for Tina? A) Recommend the sale of his woe share holdings. I. is incorrect. Tina needs to determine Marl