2 Flashcards
If Nell’s cottage remained as a secondary residence and were held in joint tenancy with Sid, how much would Sid’s estate owe in taxes if he passed away today?
$0
Since the cottage is held in joint tenancy, it would pass to Nell.
- Joe is 42 (18 years till 60 so n = 18)
- Joe going to set up individual pension plans (IPPs) for themselves this year and will have the company contribute $20,000 each year
What is the maximum amount Linda can contribute to her RRSP this year? Hint: Include the allowable overcontribution.
If Linda were to retire in two years’ time, she would have a few options concerning the pension she accumulated at the school board.
Linda could keep her pension with the school board.
Linda could transfer her pension with the school board to an RRSP and then purchase a life annuity at age 65.
Linda could keep her pension with the school board until age 45, and then transfer the funds to a LIF.
Rationale:
A person must be 55 years of age to establish a LIF.
When Sid and Nell first drew up their wills, Sid knew that upon his death, Nell would not want to manage the farm. He had hoped that Joe would take over the farm, and Nell would receive income from the farming operation until she died. Which clause was Sid probably advised to have in his will?
Life interest
Rationale:
A life interest clause is a special optional clause in a will that can be used when a spouse wants to leave a surviving spouse a life interest in an asset rather than the asset itself
Despite his commitment to Palatial Landscaping, Joe promised Sid that he would keep the farm going after Sid’s death. What is the maximum adjusted cost base (ACB) at which Sid should consider transferring the farm to Joe assuming a lifetime capital gains exemption of $866,912?
Assuming Joe expected to run the farm at a loss of $4,000 in the year following Sid’s death, how much of the $4,000 loss could he deduct from his other employment income?
Joe would be operating the farm with the expectation of making a profit (meaning he is not a “hobby farmer”), but his chief source of income would not be farming. This means that he is only allowed to claim “restricted farm losses,” which are limited to the first $2,500 lost, plus one half of the remaining loss to a maximum of $12,500.
Since Joe lost $4,000, he can claim $2,500, plus $750 (50 per cent of $1,500), for a total loss of $3,250.
If Joe leaves his shares of Palatial Landscaping to Linda when he dies, what would the tax consequences be?
The shares would be considered sold for their adjusted cost base
(ACB), and would not be reported on Joe’s final tax return, because Linda would take ownership of them at Joe’s cost base.
The Income Tax Act provides for a rollover of capital property from a deceased individual to a surviving spouse at its adjusted cost base.
Assume Sid and Nell transfer the farm to Joe now and make the Muskoka cottage their principal residence. Also, assume that the value of the cottage goes to $700,000 by the time they die. Select the statement that is true concerning the tax implications of the cottage.
Since the change in use is taking place now, when the property is worth $400,000, this is considered a disposition, and they will have a $300,000 capital gain this year, and no further gains from now until the time of death.
When property changes use to or from principal residence, it is considered to be disposed of that year. A secondary residence is subject to capital gains tax upon sale or deemed disposition. Any future gains from the time it became the principal residence, however, would accrue tax-free.
If Linda works for the school board until she retires at age 60, and her salary continues to increase at the current rate, what will her defined-benefit pension plan pay her annually?
Linda’s final average defined-benefit plan pays 2% of the average of her final three years’ salary, multiplied by the number of years she was in the plan.
Linda was in the plan for three years at the time she was 38.
She will retire in 22 years, when she is 60. She will have been in the plan for 25 years total.
The stock index portion of Joe’s RRSP portfolio grew 86.4% this year.
Calculate the alpha for that part of the portfolio.
Alpha is the value added to a fund, relative to the benchmark index, given the portfolio’s risk (beta) relative to the index. The alpha of an index (or index fund) therefore, is zero, as the actual rate of return equals the expected rate of return.
To answer the question about which part of Joe’s portfolio provided the best risk-adjusted return last year, we follow these steps:
- Read: Understand the question, which is asking for the best risk-adjusted return.
- Identify: Locate the returns for each part of the portfolio and the standard deviation or risk for each.
- Skim: Look in the case study for the return and risk data for each component of Joe’s portfolio.
- Extract: From the question, we have returns of the funds and the standard deviation for each.
- Understand: The Sharpe ratio is used for risk-adjusted returns, calculated as (return of the portfolio - risk-free rate) / standard deviation of the portfolio’s excess return.
- Calculate: Compute the Sharpe ratio for each component.
- Compare: Look for the highest Sharpe ratio among the components.
- Eliminate: Discard the components with lower Sharpe ratios.
- Select: Choose the component with the highest Sharpe ratio.
- Review: Check calculations for accuracy.
- Manage: Perform these steps quickly to efficiently use time.
- Practice: Get familiar with these calculations for similar future questions.
The question provides the Sharpe ratio calculation for each fund:
- DBD balanced fund ratio: (5.76 - 3.1) / 7 = 0.38
- DBD stock index fund ratio: (6.4 - 3.1) / 12 = 0.28
- DBD growth fund ratio: (8.0 - 3.1) / 13.5 = 0.36
The risk-free rate used here is 3.1%, and the Sharpe ratios are calculated using the returns and standard deviation of the portfolio’s excess return.
The DBD balanced fund has the highest Sharpe ratio of 0.38, indicating it provided the best risk-adjusted return.
The selection A. DBD balanced fund is correct based on the provided Sharpe ratios.
From the case-study information, what is the approximate monthly cash flow for Joe and Linda’s household? Round all figures to the nearest dollar.
If the Russells continue to contribute $4,000 to the RESP each year for the next five years, and earn 6% compounded annually, what would be the approximate value of the RESP at that time?
Jerry and Tina agree that they want to retire together. How much should Tina expect her registered plan to payout annually if it were to be fully exhausted by age 90? Assume the RRSP is converted to a RRIF at age 60.
Assume Tina’s employer upgraded her pension plan to an entitlement of 2% per year based on the average of the final three years of her earnings. Based on her current salary, how much additional annual pension will this create for her when she retires at age 60?
If Tina had invested her $8,000 bonus into a labour-sponsored fund inside her
RRSP, c calculate the maximum tax credit she could have received, assuming the LSVCC was eligible for full federal and provincial credits (she lives in a province with a 15% credit).
