CFP Exam 1

Question 1

How to handle insurance policy among divorce

Answer 1

policy can be owned by person who is beneficiary as policy is designed to benefit them (ex spouse). spouse is beneficiary as well and receiving spouse can pay premiums through an increased support calculation. term or perm depends on if need is temporary

Question 2

options when someone loses a job

Answer 2

stop investment contributions (important to determine consequences and if contributions can be made down the road), sell a vehicle, get lower paying job, implement a spending plan, pay down debt using assets,

Question 3

cap gains on unrestricted shares and employment income on options

Answer 3

average cost basis (determined when shares were exercised). options taxed as employment gain between exercise and fmv at purchase (50%). that 50% charged can be deferred if company is private and shares are held for 2 years. 50% offsetting deduction given when exercised

Question 4

Advantages of reducing share holdings

Answer 4

diversification, us source dividends (less tax efficient if a us company), lock in a gain (if shares are trading near highs, good time to reduce position), t1135 filing requirement (if you own us assets over 100k outside of registered account)

Question 5

Review investor behaviour

Question 6

taxation of insurance transferred between corp and personal (40k csv and 25k acb)

Answer 6

transfer policy to person ownership - passive income to corp based on csv-acb. taxable gain for vern based on shareholder benefit. fmv of policy - anything he gives to corp in exchange. fmv = pv of death benefit - any premiums to be paid. (fmv is higher if you are sick)
cash out policy in coirp and take the money out. csv-acb = passive income. vern takes out ineligible dividend.

Question 7

Asset sale vs share sale

Answer 7

share sale means buyer inherits assets att ucc/acb at which they’re sold. asset sale means seller has to pay taxes and cant use lcge. seller will prefer share sale, buyer wont.

Question 8

Where to hold which asset

Answer 8

non reg - cash and cdn equity
tfsa, fixed income or cdn equity
RRSP/LIRA - us equity, foreign equity,

Question 9

Taxes on investment income

Answer 9

fees charged after returns. taxes based on return after fees charged.

Question 10

Pension buyback, is there enough room?

Answer 10

can be bought back after retirement. if pension is commuted and no rrsp room, ask yourself whether there will be income generated after retirement to create room required.

Question 11

CDSG Advantages

Answer 11

government funded matching contributions (1k for 1k or 3x 500 and 2x 1000 for income under 106k), doesnt interfere with disability supports, no tax consequences while it grows, helps to grow long term savings

Question 12

Allocation of investment savings

Answer 12

each person invest in tfsa, something should be going in for tax diversification purposes. tax free access to liquid assets,
rrsp vs spousal - if there is an income discrepancy and higher earner has more, focus solely on lower income spousal rrsp.
maximize resp for grants for non disabled child,

Question 13

Ideal disability coverage, definition of disability, benefit and waiting period, riders

Answer 13

2/3 of income (to roughly equal after tax income). regular occupation (own occupation) is going to be cost effective trade of between cost and coverage (for non professional), 30-90 day waiting period, longer period is acceptable with evidence of savings and two working partners. benefits till 65 are usually most appropriate for ltd. common riders, inflation protection, residual benefits, future income option. residual are for self employed person who may recover and have limited return to work. inlfation and future income option important for youyng people whose income and needs can rise over time

Question 13

future income option

Answer 13

can increase disability benefit on anniversary without medical underwriting

Question 14

residual benefit

Answer 14

you make 10k per month and return to work but can now only earn 7k per month. a 6k total disability policy would pay a prorated amount of your total benefit. 30% income lost * 6k = 1,800 per month. So you’d receive 7k + 1.8k tax free.

Question 15

Assets that are difficult to classify

Answer 15

CSV of universal life policy. could be invested in many different ways.
preferred shares - generally fit into fixed income but sometimes have risk characteristics that are more like equity.
balanced mutual funds - dont know the exact cash, income, growth ratio.
corporate bonds rated a or lower - could be more volatile than a traditional fixed income portfolio

Question 16

Buying risky bonds in rrsp

Answer 16

no tax consequence changes, does the client have the risk tolerance?
could provide lower return than accustomed to, if time horizon is longer than term to maturity, there is reinvestment risk, concentration risk is always a problem (defualt risk)

Question 17

type of policy and owner

Answer 17

are they spending beyond their means? term more appropriate if theres cash flow issues. should generally own a policy on your life. if theres a marital breakdown, can change the beneficiary.

Question 18

amount of insurance

Answer 18

pv of future cash needs, make sure to add up all obligations on death and deduct any survivor benefits.

Question 19

factors to consider for rrsp withdrawal

Answer 19

tax consequences, cost of debt vs investment return, behavioral issues (just saving to pay down debt?), liquidity restrictions (if its through work)

Question 20

Recommendations when theres debt problems

Answer 20

prepare a budget (when theyre spending beyond means), prepare wills, especially after marriage or child, pay down credit card debt as its very expensive

Question 21

Additions to cash flow and deductions from cash flow

Answer 21

additions equal tax credit + dividends paid + tax deduction for loan.
deduction from cash flow = tax payable for each individual. . difference is net cash flow.
net cash flow - cash flow without spousal loan = net benefit or loss.

Question 22

Spousal loan issues among separation

Answer 22

is loan repayable immediately? should be included in loan document or post nuptial agreement (domestic contract or marriage contract) to handle. should address is market value is lower than loan
-loss of inheritance protection (can enter into agreement referenced above. don;t be afraid to use the same answer twice if it fits).
-how is income treated for spousal support. defined in post nuptial agreement
-what if risk tolerance doesnt support the investment? risk profile should be considered before making the loan

Question 23

spousal loan requirements

Answer 23

must be formal loan agreement, must pay interest by jan 30th of following year, allison must claim interest as taxable income.

Question 24

transferring into trust where you and spouse are only beneficiaries during lifetime

Answer 24

transfer everything at acb if you and spouse is only beneficiary
if anyone else is entitled during lifetime, transfer at fmv (insurance policy fmv is csv). if anyone

Question 25

non reg tax in trust and life isnurance, cap gain on cottage

Answer 25

attribution applies. death benefit paid to trust and then to beneficiaries, all tax free. cap gain on cottage taxed to trust or the last to dies terminal return (of spouse and owner)

Question 26

capital interest and residual interest scenarios

Answer 26

first spouse dies. the other receives income, no cap distributions allowed, no taxes on cap distributions.
marriage breakdown, income earned included in spousal support calculations, capital not necessarily protected by trust from division. no tax on capital distributions required by division of matrimonial property.
last of spouses dies - income ceases, assets distributed to capital beneficiaries (not necessarily even), tax is paid by trust or last to die.

Question 27

base benefit, non evidence max, plan maximum, all source maximum

Answer 27

think about how each of these are affected by income choices and how they impact the client. at what income level does this become relevant. all sources maximum is set percentage of after tax income. for example 80k salary at 34% average tax rate = 4266/month. 85% of this (for example). meant to ensure there is motivation to return to work. becomes more of an issue in higher tax brackets

Question 28

ways to supplement disability coverage for owners

Answer 28

top up solutions (second policy structured as second payor), change to insurer that covers dividend income and/or retained earnings. (some will provide this), replace dividends with salary, disability carve out (have them acquire individual insurance and take themselves of ltd plan)

Question 29

reasons for a buy sell

Answer 29

death (partner not able to take over business die to inexperience), disability or serious illness (cant contribute, hurts morale of other business owner), failure to perform, morals clause, loss of capacity, marital breakdown, personal bankruptcy (prevent shares from falling into creditors hands

Question 30

considerations for triggering events

Answer 30

purchase price, how will it be valued (could it be difficult?) can use shotgun mechanism, prof business valuator when triggered or get a valuation each year, just set the value in the agreement,

timing of purchase - how long after triggering event does it take place. Set a common timing or unique timing for eacyh event based on needs

source of funds - where does the money come from (can use insurance, loan agreement, borrow party from lender, could be difficult though)

Tax handling - how will proceeds be taxed, whats the liability and how will it be paid? determine whether they’re paid capital dividend, eligible dividend, return of capital, or eligible dividend

-dispute resolution. use a mediator or a coin flip to settle disputes

-mismatch between valuation and funds - purchase price doesnt match available funds (split the difference or agree to donate to charity).

Question 31

gen corp tax rate

Answer 31

15% fed, 10% provincial

Question 32

when you lose sbd

Answer 32

more than 50m of capital. 10-50m of taxable capital reduces limit as well.

Question 33

when rental income becomes active

Answer 33

at least 6 people employees working in rental business.

Question 34

you can pick which dividends to pay and whom to pay them to. (pay eligible and leave non eligible)

Question 35

often better to buy insurance within corp. not deductible to individual or corp. just means that you can fund insurance with corp dollars, where you;ve paid less tax.

Question 36

IPP

Answer 36

Can only be employee. can be set up in operating company or holding company. can set up separate ipps for each holder, they could be part of the same ipp. rrsp funds are transferred to ipp and any shortfall has to be made up by sponsoring corporation. the corporation would then fund the plan annually based on actuarial calculations. the corp reports funding every 3 years. any shortfalls are made up by the corp based on a asssumed rate of return of 7.5%. Annual funding obligation increases each year. Can convert ipp to a db pension, like any other db pension receiving a fixed income. can use to buy annuity as long as the terms are the same as promises under ipp
can also be transferred to a lira. maximum transfer values and unlocking provisions that would normally be available apply as they normally would. Most generous benefit is 2% of employment income.

The funding limit is based on an actuarial calculation of the cost of funding a defined benefit pension. most generous is 2% of employment income.

Question 37

RCA Process

Answer 37

Money from corp is tax deductible and could be put towards an RCA. it would face a reasonability test.20% of income is reasonable for an owner operator but it can vary.