CFP - Personal Assets section Flashcards
(35 cards)
How much can a person withdraw from their RRSP for HBP reasons?
Are HBP withdrawals taxable?
What happens if you don’t pay back your scheduled HBP withdrawal?
How long is the HBP withdrawal period, and how long after withdrawal does it start?
How long after you make an RRSP contribution can you withdraw money from your RRSP for HBP purposes?
What is the payback instalment period? When does it typically start
- Allows a couple to withdraw up to $35,000.00 each from their RRSPs
- No. Money drawn for HBP purposes is considered an excluded withdrawal
- You must repay the minimum amount in your scheduled HBP withdrawal, or the difference counts as income
- Equal annual instalments made over a period of 15 years - begins 2 years after the year the HBP money comes out, or 2 years + 60 days of the following year
- 89 day no contribution period before you can take a HBP withdrawal
- You can use the funds to cover any costs related to purchasing the home
- You are losing out on the returns of the money in your RRSP
Mortgage details:
What amount of down payment requires mortgage loan insurance?
What happens if you break a mortgage?
How to calculate IRD?
Differences between an open and closed mortgage?
• Downpayment of less than 20%, you would have to purchase mortgage loan insurance
- Pay a penalty if you break a mortgage, either 3 months interest or IRD
- IRD = New rate given - Current rate x number of years remaining on your 5 year term. 18 months x mortgage balance = 1.5 years
- Open mortgage allows you to pay off large chunks without penalty, but comes with a higher rate. Closed mortgage does not allow lump sum or large payments, but generally comes with a lower rate
• First loan or mortgage gets preferrable rate – 2nd or 3rd gets higher rate
• Amount of the payment depends on amortization period, interest rate and payment frequency
- Conventional mortgage is normal, collateral mortgage is not registered through the Personal Property Security Act
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Car Loans and Car Lease
What is the typical length of a car loan?
Who owns the car when a person takes out a car loan?
How much do you typically need as down payment for a car loan?
What has higher payments, a 5 year car lease or a 5 year car loan?
Are car loans open or closed?
• Available from the car dealer, manufacturer, or from a lending institution like a bank
• 3-4-5 year terms typically (36-48-60 month)
• Title remains with the lender until the loan is paid off. The car does not belong to the person
• Car or track is collateral for the loan and may be repossessed if you default
- A 5 year loan payment schedule requires much higher payments than a 5 year lease. Loan is paid off after 5 years and you fully own car. Lease has residual value at the end of 5 years.
• Lenders typically require a downpayment of 10 to 20%
• Interest rate could be fixed or variable
• Interest rate would be calculated monthly and so would payments
- Car loans are typically Open loans
- Car lease: holding for less than 5 years
Moving expenses and income deductions when moving for a job?
- You can deduct the cost of moving and travel when it comes to job purchases
- You can deduct the cost of travel and storage
- You can deduct the cost of selling your previous residence and the cost of realtors. AKA the realtor fee
- You can deduct utilities paid at your previous residence
RESP accounts
What is the maximum amount one can contribute to their RESP?
What is the maximum amount of grant money the government can pay?
What is the family income required for extra grant money eligibility? How is it calculated?
What is the maximum EAP withdrawal year 1?
What is AIP and an AIP withdrawal from an RESP when a kid doesn’t go to school?
When do you want to open an RESP family plan instead of an individual plan?
- $50,000 lifetime contribution limit
- Maximum grant of $7,200
- Extra grant up available for low income individuals. Low income individuals making less than 50k household income can receive an additional $100 in CESG (20% of first 500 contributed).
- Extra grant available for low income individuals with less than 100k income - receive up to an extra $50 (10% x of first 500 contributed)
- The subscriber of an RESP may be able to withdraw base contribution amounts at any time because they still retain control of the capital
- EAP is an Educational Assistance Payment - the max you can draw is $5,000 year 1
- Subscriber based withdrawal. AIP is the earnings/income that are made on contributions, grant and bond. They can be used for education purposes, or can be withdrawn back to the subscriber. It will then count as income. If the person has RRSP room, the AIP can roll into the RRSP. ** Beneficiaries cannot be in school and must be 21 years of age**
- Has to be a specific education program ; can be setup for Univeristy, college, apprenticeship or professional courses
- RESP family plan ; can be created by anyone who is not direct blood. Best created for someone who is no a direct relationship. Family plan allows pooling of grants and income
Income Tax benefits and objectives
Avoidance strategies for normal individuals that are legal
- Using a TFSA
- Using the principle residence exemption
- Buying appreciating capital property
- Purchasing life insurance
- Using the lifetime capital gains exemption for qualifying shares of a small business corporation, or farming property
- Using a TFSA
Lifelong Learning Plan
What is the maximum you can draw in 1 year from your RRSP for the Lifelong Learning Plan? What is the lifetime limit?
How long must the education program last to qualify?
How many hours a week must the student spend in the program to qualify?
When do payments have to begin, and how much is the first repayment?
- withdraw up to $10,000 from your RRSP for you, your spouse or your partner. $20,000 maximum
- Must be a full time student and the student must enroll in a qualifying educational program - must be ESDC certified or at a post secondary level
- the educational program must last 3 or more consecutive months
- It requires a student spend 10 or more hours per week in the program
- Students have 5 years from the date of their first withdrawal to make an LLP repayment, or 2 years after they were no longer students
- You repay 1/10 of the LLP balance over 10 years
US Taxation rules for Canadian snowbirds
When are Canadian snowbirds considered US citizens - under which two conditions/tests?
What is the definition of resident alien?
What is the formula for the Substantial Presence Test?
If one fails the Substantial Presence Test and is about to have to file US taxes, how can a Canadian Snowbird apply for relief? What are the conditions?
If a Us-Canadian dies with property/assets held in the US which their kids are set to inherit, what is the approximate estate value that’s considered to be exempt from US inheritance tax?
What percentage of US withhold tax is applied on Estates greater than $300,000 ?
- Canadians citizens may be considered as U.S. citizens for tax purposes if they have a Green Card under the Lawlful Permanent resident test, OR, under the substantial presence test of 183 days.
- Resident alien: You are taxed like a US citizen under the Greencard test, or the substantial presence test. You are taxed on your Worldwide income like a normal US citizen.
- The Substantial presence test of 183 days is based on the number of days present in the United States in the current year (this year) + 1/3 of days last year, and 1/6 of days two years ago. If someone spends more than 183 days, they are automatically considered U.S. resident aliens.
- The ‘closer connection exception’ allows Canadians who go over on the 183 days rule, to apply to the US government with IRS Form 8840. This only works as they are not over 183 days in the USA in ANY calendar year.
- GSTT ( Gift, generation skipping transfer tax) exemptions reduce estate transfer taxes for US-Canadians with estates under $5.49 million in value
- On Estates > $300,000, 15% withholding tax applied on the US property when you sell a property
- Taxed on the person who is donating the property, estate or gift. NOT the person receiving
- For Canadians, gifts made to
Pension / LIRA unlocking details
When does the Government allow you to unlock your Pension (list 3)?
What are the conditions for transferring an employer pension, which would generally transfer out to a LIRA, into an RRSP or RRIF?
At what age can you unlock half your LIRA? What happens when you unlock it?
What value can you unlock your LIRA if it’s small and have it transfer to an RRSP?
- Financial Hardship related to medical costs, or paying rent / your mortgage
- Non-residency - you can unlock if you leave Canada
- Shortened life Expectancy
- You can unlock your employer pension and transfer it’s total value to an RRSP or RRIF if it’s under 12k in value (20% of the YMPE)
- You can unlock half your LIRA at age 55 using the 1 time LIRA unlocking provision. 50% transfer to an RRSP, 50% transfer to LIF
- You can unlock your full LIRA is less than $32,450 (40-50% of the YMPE)
Open Credit and credit penalties
How are most loans structured?
What’s the formula for calculating the interest rate penalty when it’s 3 month?
What is APR and what does it include that’s different than normal interest?
How is TDS calculated?
How is GDS calculated?
Open credit is the most common form/type of credit. It is the most typical way loans are structured. Mortgages are typically structured as closed. Closed for mortgages is cheaper.
- There may be penalties for paying off debt sooner. The two most typical fees for breaking a loan by either not paying it or paying it off sooner:
Three Month’s interest = Debt Balance x Existing mortgages rate x 3/12 or 3 months
IRD = Debt or Mortgage balance x difference in interest rate x time remaining on the loan (typically 1-5 years for mortgages)
- Debt repayment - Ratio of Interest to Principle:
Solve for PMT on calculator. PMT = total payment. Then, take the total loan amount and multiply it by Interest for the 1 interest period to figure out interest payment#1. Take total payment - interest payment #1 = Ratio of Principle / Interest - Nominal interest rate = the periodic interest rate, multiplied by the number of periods per yer
- APR percentage rate = when you add any additional fees and admin to the value of the loan, and you solve for i (the interest rate being paid)
- TDS is total DEBT payments: Mortgages, Housepayments, Loans / gross monthly income
- GDS is just total Mortgage and House payments / Gross monthly income
CPP, OAS, GIS
- Is CPP and OAS taxable? Is CPP disability income taxable? CPP survivor income taxabl?
- Is GIS income taxable?
- Does OAS and CPP Income affect GIS threshholds?
- What is Survivor OAS, and when does it pay out? When does it cease?
- Does survivor CPP cease if you remarry?
- What percentage does CPP increase per month if you take it after 65? Decrease before 65?
- What is the amount of the YBE where no CPP comes out of income?
- What percentage will OAS increase if you delay it?
- How much is the CPP death benefit that pays to the estate upon death?
- When does the CPP Child Survivor benefit pay out, and up to what age of child? Is it taxable?
- When does CPP disability pay out and for how long? Is it taxable?
- What is the blended tax rate if your combine OAS clawback
- How does OAS, CPP, and GIS benefits, GIS Allowance benefits count towards income / taxable income
- CPP and OAS are taxable, so is CPP disability and survivor income
- GIS income for low income seniors is NOT taxable - is generally applied for when you apply for OAS at age 65
- Survivor OAS Pays out between 60-64. It ceases if you remarry
- Survivor CPP does not cease if you remarry
- CPP normally starts at age 65, if you take it early, it’s 0.6% less per month
- CPP increases by 0.7% per month after age 65 if you delay taking it
- CPP based on 47 years (18-65), and best 39 years
- CPP is not taken on the first $3,500 of income known as the YBE
- OAS minimum to qualify: Having lived in Canada at least 10 years at age 65, 20 years if you’ve left the country. For max OAS it’s having lived in Canada 40 years.
- OAS increases by 0.6% per month after age 65 if you delay taking it
- OAS clawback, 15 cents on the dollar between 80,000 and 120,000 of income
- CPP Survivor is paid to a spouse when a CPP contributor dies, age 18-59
- CPP Allowance for the survivor is paid when a CPP contributor is age 60-64
- CPP death benefit amount is $2,500 1 time credit to the Estate
- CPP Child survivor benefit - pay CPP to dependent children (under age 25) when their parent dies who is a CPP contributor. Is a taxable income.
- CPP disability pays until you are 65 if you contribute to the CPP and have a lifelong severe impairment, and it is taxable
- Blended tax rate when in Clawback is your (Marginal Tax Rate % x 85% ) + 15% clawback
- All 4 count towards income. Amount that count twaords income help with tax credits. GIS and GIS Allowance are removed from TAXABLE income after
Defined Benefit Pensions and calculations to figure out Pension benefts
What is the formula for a typical pension?
What is the formula for a high earner and their pension?
At What age can a DB pension be split? Can a DC pension be split?
-Normal formula is:
Avg Earnings x 1-2 % x Years worked
- High income person’s pension formula:
Avg earnings above the YMPE 64,000 x 2% + Avg earnings below the YMPE x 1-2% (range) X Years of serve - Age + years worked = Where someone lands on the Pension factor scale.
- Full pension can be achieved despite years worked sometimes at age 65 depending on the plan
Typical Pension Factor for full pension is 90
DB pensions can be split starting at age 55
DC Pensions can be split starting age 55
Special compensation for executives
What is a DPSP? How do contributions count and who makes the contributions? How long is the vesting period?
What happens with non qualified stock options - what price are they issued and when are they taxed?
RCA - What is a retirement compensation agreement? Does it use RRSP/RPP Room?
IPP - What’s an IPP and who benefits?
IPP - At what age do IPPs become better than RRSPs?
IPP - Can a business owner deduct what they contribute to an IPP?
DPSP - Deferred profit sharing plans are registered with the CRA and contributions to them count against an individuals RRSP contribution limits. Employer contributes to the plan. NO employee contributions allowed. There is a 2 year Vesting period.
Canada
Non qualified stock option - when the company issues stock, they issue them below fair market value. You do not have to report the option as income. When you exercise the option, you get the shares at a discount, and the difference between the Market Price and Discount price you pay Full income tax on. You also receive full RRSP room. You then get a stock option adjustment where only 50% of the difference is taxed. this is NOT a capital gain, even though it’s taxed like one.
RCA : RCA is a trust setup for a high income earning executive or business owner. They are funded by the business/corporation. They are taxed every year like a trust, but it allows for a tax deferral down the road. Only 50% of an RCA can be invested which is the downfall. Makes sense for an executive in a very high tax bracket. It is known as a SERP retirement account. Provides a taxadvantage if an individual is in a tax bracket greater than 50%.
IPP : Pension plan setup by small business owners or corporations to replace the RRSP. Contribution amounts go up significantly past the age of 40. Contributions to an IPP are deductible to the business which is what makes them attractive (like an RRSP for business owners). The income stream is considered that of a Defined Benefit Pension, which means the income can be split down the road. They cost money to setup and administer which needs to be taken into consideration. The IPP once setup can only be drawn at age 50, splitting can be done at age 55. IPPs typically draw down at age 65 however.
Business owners can deduct what they contribute to an IPP
Special Trusts and their characteristics
Explain these special trusts: Spousal? Alter Ego? Insurance Trust? Qualified Disability Trust?
What are general trust rules:
1) General taxation rules when you move assets to a trust?
2) After how many years are a trust assets disposed?
3) Explain what GRE is?
4) Which trust avoid probate? Living or testamentary?
5) What type of protection do trusts provide?
6) How is income inside a trust taxed? Can a minor receive that income?
Spousal Trust: All assets are sent to a trust for the sole benefit of the other spouse. assets role into the trust at cost. Typically is testamentary. There is no 21 year rule which is a major benefit. It protects from creditors. Typically good for blended families.
Alter Ego Trusts: Must be 65 years of age and created as a living trust. Allows a person to transfer their assets into a trust, where they are the trustee, and avoid paying probate. Having the assets not form part of the estate is the main reason why. No deemed disposition, and no 21 year rule. Good for high networth people.
Insurance Trusts: Typically used for insurance proceeds for a minor. Insurance proceeds are paid upon death to fund the trust. Held by a trustee.
Qualified Disability Trust: Isn’t an actual trust. It’s a Special trust election that can be applied to any trust being managed for a disabled person. This includes a Henson trust. Income is always 100% taxed at the Graduated Rate as a result of being Qualified. Qualified disability trusts are also typically discretionary trusts.
General Trust rules:
1) Transferring to a trust creates a deemed disposition, in life or in death, unless it’s a special trust, like a spousal trust or alter ego trust
2) After 21 years a trust triggers a deemed disposition
3) When someone dies and their assets are held by the Estate in trust, the first 36 months they are taxed at a graduated rate instead of the highest marginal tax rate
4) Intervivos Trust avoids Probate (trust setup while alive). Testamentary Trust does not avoid probate
5) Trusts are typically creditor proof
6) Income inside of a trust that is not a GRE trust, is taxed at the top marginal rate. If that income is distributed to beneficiaries, then it accumulates inside the trust. If it is distributed, the trust gets a credit and the person who receives it is taxed. Person has to be 18+ to receive income
Investments - Canadian Dividends and grossing them up
What is the gross up rate for eligible and non eligible dividends?
How is the tax credit calculated for eligible and non eligible dividends?
How is after tax income and credit income calculated?
Canadian dividend gross up rules:
Gross up of an eligible dividend is 138%. or 1.38 x the Dividend income received. Eligible dividends come from a Canadian business that already paid tax inside the corporation at a high tax rate.
Gross up of a non eligible dividend is 115% or 1.15 x the Dividend income received. Non eligible dividends come from a Canadian business that paid tax at a low tax rate inside the corporation.
Tax credit
Eligible: Gross up amount x 15% Fed rate + provincial rate if give
Non Eligible: Gross up amount x 9% Fed rate + provincial rate if given
Taxable income:
Eligible Gross up amount x Tax rate = Tax payable
Non eligible gross up amount x Tax rate = tax payable
Taxable payable - Tax credit = Total after tax and credit income
Investments - formulas for calculating investment returns
BETA : Expected return portfolio - risk free rate / Expected Return Market - Risk free rate
Expected return of a portfolio: Risk Free % + Beta x ( Risk Market - Risk Free % )
Alpha : Return Portfolio - Expected Return Market
Sharpe Ratio : Return Portfolio - Risk Free / standard deviation of the portfolio
Treyner Ratio: Return portfolio - Risk Free / Beta of portfolio
CPP sharing - process for figuring it out
What are the 4 steps in figuring out the Pension sharing amounts?
Both spouses must be at least 60
Percentage that can be shared : Years Living Together / Years contributed to the CPP
IE Couple that lived together 20 years and contributed for 30 = 20/30
66% x Person 1s CPP = Amount that can be shared from Person 1
66% x Person 2s CPP = Amount that can be shared form Person 2
Person 1s CPP - Amount that can be shared Person 1 = Amount that can’t be shared
Person 2s CPP - Amount that can be shared Person 2 = Amount that can’t be shared
Amount that can be shared Person 1 + Amount that can be shared Person 2 / 2 people = Amount each person gets of shareable CPP
Amount of Shareable CPP + Amount that can’t be shared = Total CPP
Tax deductions, credits and benefits
- Basic Federal tax Credit on first $14,398 earned essentially makes that amount earned tax free. Is a 15% tax credit.
- Child Care Expense credit. Can be applied if a family has $150,000 income or less.
- Canada Child benefit is a non taxable benefit for low income families- per child under 0- 6, and a lesser amount per child 7 - 17
- ## Disability tax credit - non refundable tax credit that gives a 15% credit based on a max income of $8,870.00
Tax deductions
Are union and professional dues tax deductible?
When can moving expenses be deducted?
Are Spousal payments tax deductible to the payer? Are they considered a taxable income?
Are Child Support payment tax deductible? Considered taxable income?
When are legal expenses for child support and spousal support tax deductible?
Are student loans tax deductible?
When are home office expenses tax deductible?
How can you determine the amount of expenses that are tax deductible if you’re self employed?
When are non monetary benefits taxable to the employee?
Is EI tax deductible to a business owner? CPP?
- Courses, union and professional dues and expenses can be deducted by anyone / employees as long as it’s relevant to your job / career
- Business moving expenses - if you move and relocate, expenses are deductible, as long as you are within 40k of your new work/job
- Spousal payments - deductible by the payer, and taxable to the recipient
- Child support payments - NOT deductible or taxable
- Legal battles to ENFORCE Child Support / Spousal payments are tax deductible. The original legal expenses when going to court over child support and spousal payments are no tax deductible.
- Carrying charges, AKA Interest charges, are deductible as long as the purposes of the charge is to earn Income
- Student loans are NOT tax deductible
- Home office expenses can only be deducted if you are FORCED to work from home. If you work from home voluntarily they are not deductible
1. Self Employed: Deductible expenses are based on sq footage of the work space relative to the total house. You can deduct Home maintenance, Insurance, Property taxes, Mortgage interest, Rent (% of rent relative to office size) - If an employee receives a benefit from an employer, and its for the benefit of the employer, the benefit is not taxable.
- no EI is not deductible, but you can choose to opt in or opt out if you’re self employed. CPP you get a credit for the employer portion
Capital Cost Allowance and Undepreciated cost of capital
- Capital Cost Allowance is depreciation removed from the cost of an income generating asset of the business, as defined in the income tax act
- Year 1 - Capital Cost can only be depreciated at 50% of the defined value Year 1 - the year it was purchased.
- Undepreciated Capital Cost: The amount of value left after capital cost is depreciated
- Capital Cost Allowance recapture - when an item is sold, the difference between the Undepreciated Capital Cost and the sale price.
- If there is a positive recapture, the value of the recapture is treated as income. if the item is sold for a gain, you will have both income and a capital gain
- If it’s sold below the undepreciated capital cost value, you have a terminal loss
- Terminal loss reduces business income
Complicated Insurance principles -
How are Life Insurance policy gains treated?
3. What happens if the beneficiary of a policy dies?
How are exempt policies taxed?
How are non exempt policies taxed?
What happens to the death of the life insured person in a non-exempt permanent policy?
What happens when you surrender a policy?
Do permanent policies transferred to a spouse create taxable income? How about to children?
When a Universal Life insured person dies, what are the characteristics of the death benefit?
- Life insurance gains are always treated as taxable income, not capital gains, unless they are paid for by a corporation
- Exempt policy, the PAR accounts dividends and growth are exempt from tax
3. If the beneficiary dies, it reverts to the policyholder’s estate. It’s best for the policyholder to assign a new bene. as quickly as possible. - Non exempt policy, there is a growth account and it’s taxed
- Death of the life insured person, proceeds are paid tax free. If it’s a non-exempt permanent policy, there will be taxable income to pay relative on death. Difference between the accumulating growth fund and the policy ACB
- Surrender of policy - Policy income is the difference between the Cash surrender Value and the ACB. That’s for exempt policies.
- Permanent Policies transferred to a spouse do not create taxable income because of the rollover.
- Permanent policies transferred to a child do create taxable income unless policy is on the life of the child in the name of the child.
- Death benefit + Accumulating investment fund are paid out at death of a Universal life policy
Estate Freezes and business succession
What is an Estate freeze?
What happens to shares of a company during an estate freeze? What happens to their value when swapped?
- An estate freeze is when you freeze existing growth assets, so that the future growth occurs in the hands of the taxpayer’s children or spouse
- Most common way to trigger an estate freeze is to create a holding company and restructure the Shares of your company
- Exchange common voting shares of your company, for a 51% stake of the holding companies preferred shares. Transfer happens at cost, and no capital gains arise.
- Cost base of common shares flows to the preferred shares (equal cost)
- The preferred shares the business owner gets back are voting, non-participating, non-cumulative redeemable shares, with a fixed dividend rate
- The preferred shares pay income and there’s a risk that the rate chosen does not provide enough.
Financial Planning Strategies at Death or approaching death
- What are 3 financial planning strategies at death or approaching death?
- How are debts calculated for probate purposes and what is a strategy surrounding debt?
- How much can you donate to charity in the year of your death?
1 File a Rights and Things return. Income from investments, set to be received, or from business transactions, employment, employment bonuses that occurs post mortem can be filed on a separate tax return.
2 Rollover Registered Assets (RRIF/LIF) to the spouse without deregistering them as long as the spouse is set as beneficiary.
3 Non-registered assets, accounted for explicitly in the Will, can be rolled over to the other Spouse at its original cost. This includes investments, property, etc…
- Debts are not subtracted from asset values when calculating probate, except for mortgage debt at death. Therefore, it might be worth it to transfer personal debt into mortgage debt to minimize probate
- 100% of taxable income charitable donation allowed in year of death. Normally capped at 75%
- Buying an annuity with registered assets (RRSP/RRIF) for a dependent will not trigger the assets passing through the estate if
Financial Planning Strategies - Splitting Pension income
What age can regular pensions be split? RRIF / LIFS be split?
What is the formula to calculate a RRIF withdrawal?
What is the goal of splitting Pension income?
What are tax credits that can be split when retired?
What’s a spousal loan strategy?
What happens when you gift to a minor tax wise?
- Splitting Pensions (Defined Benefit / RPP/ DPSP/ Defined Contribution / IPP / RCA ) before age 65 (minimum age 55) with a spouse
- Splitting RRIF/LIF Income pension income age 65+ with a spouse
- Taking lower RRIF income based on spouses age can only be declared once and cannot be changed. 1 over 90-age
- Goal of splitting Pension income is to equalize the income levels, and take advantage of the Pension tax credit on the first $2000.00 of pension income a person receives.
- Tax credits can be split: Age tax credit when you turn 65, Disability Tax Credit, Pension tax credit, and education tax credits. These should be split/given to the higher income tax bracket spouse
- Making a spousal loan - transfer securities at their FMV to a spouse without triggering a gain at 1%.
- Sharing CPP income
- Generating capital gains in the hands of a minor. Gifting to a minor attributes income back to the giftor, but the minor can enjoy the capital gains.
- Gifting to adult children
