CY Bonus Flashcards

Question

Accelerated Payments

Answer 1

This results in an additional amount being repaid each year equal to one full monthly payment and is known as an "accelerated bi-weekly payment". The result is that the borrower pays 13 months' worth of mortgage payments each year and "accelerates" paying down the mortgage. Exam tip: Know the difference between a "weekly payment" and an "accelerated weekly payment". Notice it is the accelerated version that results in an extra amount equal to the monthly payment being repaid each year. For example, assume the monthly mortgage payment would be $1,000 (which is $12,000 per year). Under an accelerated payment plan, $13,000 would be repaid each year.

Answer 2

Take note that there is a difference between "accelerated payments" and an "acceleration clause". Because they sound very similar, they might provide for a trick question on the exam. While an acceleration clause does not belong in this section, it is discussed in this tip to show you the difference. **An "acceleration clause" is a clause, common in a mortgage contract, that states that the full principal amount plus accrued interest immediately becomes due the moment the mortgage is in arrears (default).**

Answer 3

Example: Gina owes $250,000 on her mortgage. She has two years remaining on the mortgage term and is paying an interest rate of 4.5%. Current interest rates for a similar term are 3.0%. She would like to pay the mortgage off in full. Gina's penalty would be the greater of the following: Therefore, Gina's penalty would be $7,500, and she would need to compare this penalty to the anticipated savings achieved by refinancing.

Answer 4

are most often made at the beginning of a relationship or when contemplating marriage. Without a domestic contract in place, spouses who are separating must negotiate an agreement through what can be a very emotional time. Spouses must provide full financial disclosure to each other, and it is in each spouse's own best interest to get independent legal advice (ILA).

Answer 5

guilt, denial, anger, sadness, and, finally, acceptance.

Answer 6

Federal • However, each province is responsible for the "solemnization" of marriage. This basically means the province can establish its own rules for the marriage ceremony, such as the minimum age requirement. All provinces and territories have enacted their own marriage rules, and they vary.

Answer 7

1. Minimum age: Both individuals must be at least 16 years of age. 2. Consent: Both individuals must have "free and enlightened consent", meaning that they both understand what they are doing and the responsibilities that come along with it. 3. Previous marriage: Before getting married, any previous marriages must have been legally dissolved, which can occur through a legal divorce, the death of a spouse, or a declaration that the previous marriage is no longer valid (nullity).

Answer 8

• Married couples. • Unmarried couples who have lived together for at least three years continuously. • Unmarried couples who have lived together, had a child together, and are "in a relationship of some permanence". In this case, the three-year requirement does not apply. For this reason, one part of family law provides that an unmarried spouse has a right to spousal support just like a married spouse. However, different parts of the Family Law Act will provide for different rights according to legislation.

Answer 9

Are NOT because another section of family law defines "spouse" to include only those who were married. As a result, although unmarried spouses can receive spousal support upon separation, they cannot receive an equalization of the net family property. The family law in other provinces may differ in this aspect.

Answer 10

• Discuss the potential of reconciling with one's spouse, if appropriate, and • Provide information about marriage counseling services.

Answer 11

Family law may involve several corollary issues. • A "corollary issue" is any secondary issue that needs to be resolved as part of or prior to resolving the main issue. For example, prior to a divorce (main issue) being granted, a court must be satisfied that the parties have made reasonable arrangements for the support of children (corollary issue). If a couple has been separated for 12 months, and if corollary issues such as support, custody, access, and division of property have not been agreed to, it is possible to separate the actual divorce from these unresolved issues. These issues can then be determined by negotiation between the parties or in court at a later date.

Answer 12

Children's Law Reform Act. Note: Family law generally permits that custody and access is a child's right and not the exclusive right of the parents). As a result, grandparents or other parties may be permitted custody or access under legislation.

Answer 13

"Domestic contracts" (aka "pre-nuptial agreements") allow the parties to predetermine their rights and obligations and to regulate their own financial arrangements. The agreement allows each party to: • Define each party's rights and obligations during the relationship and in the event of relationship breakdown. • Opt out of most parts of the traditional marriage legislation. Note: For a domestic contract to be enforceable, it must be fair!

Answer 14

To be enforceable, a domestic contract should be: • In writing, • Signed by both parties, and • Witnessed (by an independent third party). Further, both parties to the contract must provide each other with full financial disclosure, allowing the other party to know what the other spouse owns (assets) and what he or she owes (debts) so there are no surprises.

Answer 15

Most domestic contracts require that the parties receive (ILA) prior to signing the contract. Although not mandatory, this is because the parties may be opting out of marriage legislation that was put into place to protect them. By receiving ILA, the court can be sure that the parties understand what they are agreeing to and are not being coerced in any way. Thus, the ILA will help to uphold a domestic contract.

Answer 16

• A failure of one or both parties to provide full financial disclosure. • A failure of one or both parties to receive proper legal advice. • The existence of undue influence, coercion, fraud, or duress when the contract was being made or signed.

Answer 17

In Ontario, the most common domestic contracts are cohabitation agreements, marriage contracts, and separation agreements. **Cohabitation Agreements** • An agreement entered into between two individuals who are living together or are planning to live together. • The agreement deals primarily with issues expected to arise if the relationship breaks down. Cohabitation is considered to involve sexual (conjugal) relations, and you can't just be roommates. **Marriage Contracts** • An agreement entered into between two individuals who are married or are about to be married. Often these contracts are drawn up because one spouse has had a previous marriage and may need to protect his or her existing assets. **Separation Agreements** A "separation agreement" is a contract made between a married couple who have decided to separate and will continue to live separate and apart. Agreements usually deal with the following: • Ownership/division of property. • Custody and/or access to children along with child support payments. • Future spousal support payments (also known as "alimony").

Answer 18

Domestic contracts are considered legal contracts. In order for a valid and enforceable contract to exist under common law, the following five fundamental prerequisites must be present, just as with any contract: 1. Valid offer and acceptance. 2. Legally competent parties. 3. Mutual consideration (or contract under seal). 4. Genuine intention to create legal relations. 5. Lawful object of the contract.

Answer 19

i. One party was unable to protect him- or herself, or ii. The unfairness of the bargain from the point of view of the party attacking the contract is such that it would shock the conscience of the court. Contracts that are overturned on the basis of duress or unconscionable transactions often involve situations wherein each spouse did not obtain proper independent legal advice (ILA). Therefore, obtaining ILA is prudent when entering into domestic contracts.

Answer 20

net family property is not the same as net worth. Each province will have its own legislation as to what is or is not included in net family property, and legislation varies among provinces. The Ontario Family Law Act (ON-FLA) generally defines "net family property" as "the value of all property a spouse owns on the valuation date less certain deductions and exclusions". In most cases, the valuation date will be the mutually agreed-upon date of separation. As of the valuation date, the value of all the property of each spouse (i.e. assets and liabilities) is determined.

Answer 21

• It does not matter if the matrimonial home is jointly owned or owned solely by one particular spouse; it is subject to equalization i.e. division) without any deduction for its value prior to marriage if it is still a matrimonial home as of the valuation date.

Answer 22

Investment or financial advisors are not legal experts and cannot provide legal advice to clients. The only advice an advisor can provide to a client is that he or she seek the legal advice of a professional who is competent and certified in that particular area of law. However, clients may need to discuss changes in financial plans due to the impact of family law issues, such as the following: • Retirement planning • Tax planning • Revisions) to risk management • Property division • Spousal support (payments or receipt) • Child support (payments or receipt) • Estate planning (wills, POAs, and beneficiary changes) • Divorce fees and costs

Answer 23

efficient frontier

Answer 24

the risk that investments having returns that are "serially correlated" are more likely to achieve lower returns over the long term and will underperform investments that have more variable or erratic returns. The longer the investment time horizon (i.e. the greater the amount of time before a specific goal must be met), the more desirable it is to have variable or erratic returns because time diversification is minimized. Remember, the greater the variability, the greater the likelihood of higher long-term returns. Note: This concept is a little bit confusing because everything you have ever learned about investing likely suggests that diversification is a good thing and reduces risk. That is true if the goal is to minimize the variability of returns. However, in this context, time diversification itself is a risk because it relates to investment returns becoming very flat over the long run.

Answer 25

1. Identifying who the family unit is. 2. Identifying all of the assets and liabilities, including human capital (the ability to earn an income). 3. Determining the risks and how serious they are. 4. Implementing plans to manage significant risks.

Answer 26

after-tax income maximization simple tax minimization

Answer 27

after-tax basis.

Answer 28

Individual Income Tax Return T-1 General

Answer 29

also known as "tax bracket" The tax rate that an investor would pay on the next dollar of earned income. Caleb's marginal tax rate is 26% based on the above tables. If his income were $160,000, his marginal tax rate (MTR) would be 29%. When investors want to compare different investments, they use marginal tax rates.

Answer 30

(also known as the "weighted average tax rate"): The average tax rate that a person pays. Caleb's effective tax rate is 19.45%, calculated as follows: = Total tax paid / Total income = $21,400 / $110,000 = 19.45%

Answer 31

• A tax "deduction" reduces your taxable income and, in turn, your tax liability. Allowable tax deductions include RRSP contributions, childcare expenses, and business losses. • A tax "credit" directly reduces the taxes owed

Answer 32

CRA allows a federal tax credit on the first $13,808 (as of 2021) of income, which effectively cancels out the tax. This credit applies to everyone. The amount changes annually. (Note: High-income earners may have their BPA reduced.)

Answer 33

Available only to people who are age 65 or older as of December 31st of the tax year. The age amount allows a qualified taxpayer who is usually retired to claim up to a certain amount with the effect of reducing their taxes owing.

Answer 34

These contributions are mandatory for employed people up to certain maximum contribution limits.

Answer 35

Bond Creditor Bond

Answer 36

Dividends from Canadian companies are taxed twice - once at the corporate level when the company earns income, and again at the personal level when the shareholder receives the dividend. To alleviate this, the CRA provides a dividend tax credit to offset the double taxation.

Answer 37

When an investment (usually a mutual fund or ETF) distributes a portion of the investor's own invested capital, it is called a "return of capital" (ROC) and is non-taxable. That is, investors are essentially getting some of their own money back.

Answer 38

**Self-Improvement Courses** • Payments are a taxable benefit to the employee. • The employee may be able to claim the tuition fee on his or her tax return. **Courses for the Employer's Benefit or Courses Related to the Specific Job** • Not a taxable benefit to the employee. • This is often the case if the course takes place during regular business hours when the employee is being paid.

Answer 39

If an employee receives a low- or no-interest loan for home purchase or relocation, it’s taxable if below the CRA’s prescribed rate. Exception: no tax for the first five years on relocation loans if used for work-related relocation.

Answer 40

If the interest rate is below the CRA’s prescribed quarterly rate, the difference is a taxable benefit. The benefit is not taxed if the loan’s interest rate is at or above the prescribed rate.

Answer 41

The prescribed rate is the minimum interest rate set by the CRA for tax purposes. If an employee receives a loan below this rate, the difference is a taxable benefit. If the loan’s rate matches or exceeds it, there’s no taxable benefit.

Answer 42

Moving costs reimbursed by an employer are not taxable, assuming the move is for work. If not reimbursed, the employee can deduct costs if: 1) moving for a job (not necessarily new employer), 2) moving within Canada, 3) new home is 40km closer to work, and 4) moving costs are deducted from income at the new location. Deductible costs include travel, household transport and storage, legal fees, and lease cancellation.

Answer 43

Personal use of a company car is **a taxable benefit**, including a “standby charge” for the availability of the car for personal use, and “operating costs” for personal driving. To reduce the standby charge, use the car primarily (more than 50%) for business. Operating costs paid by the employer for personal use are taxable, including gasoline, maintenance, and insurance not covered by the policy.

Answer 44

A club membership fee is not a taxable benefit if it’s for purely business purposes like networking for sales leads. If it’s for personal use, like a fitness or golf club, it’s typically a taxable benefit unless the employee can prove it’s solely for business purposes.

Answer 45

It allows employees to buy shares at a set price within a certain period. No immediate financial outlay or taxable benefit occurs until the options are exercised. Options may have a vesting period and can be deferred until retirement for potential tax benefits.

Answer 46

The taxable benefit is the difference between the fair market value of the shares when exercised and the exercise price, multiplied by the number of shares. For example, if the market value is $25 and the exercise price is $10 for 10,000 shares, the benefit is ($25 - $10) x 10,000 = $150,000. If sold immediately, this is taxed as employment income, potentially at a 50% inclusion rate if certain conditions are met. If sold later for more than the purchase price, the difference is a capital gain.

Answer 47

If the employee pays the entire premium, any disability benefits received are tax-free. If the employer pays the premium, the disability benefits are taxable to the employee.

Answer 48

Deferred compensation is an arrangement where an employee defers income to a later date, potentially to minimize taxes. This strategy is legitimate in certain scenarios, like a sabbatical, but deferred amounts must be paid within three years to comply with tax regulations.

Answer 49

Taxation can be deferred by transferring the retiring allowance to the employee’s RRSP in the year it is received or within 60 days of the year-end. The limits are $2,000 for each year of service before 1996 and $1,500 for each year of service before 1989 where no pension or deferred profit-sharing plan contributions were made by the employer, not exceeding $3,500 in total for those years. No deferral is available for service years from 1996 onward.

Answer 50

A "retiring allowance" can be: • A retirement bonus given as a way to thank an employee for a long tenure with a company, or • A benefit paid upon loss of employment (including a payment for damages or payments mandated by a court order or tribunal judgment).

Answer 51

• a direct transfer of funds (a gift of money) • a loan. • a transfer of property (a sale of assets).

Answer 52

"Related parties" "arm's-length" transfer.

Answer 53

Transfers between unrelated parties are assumed to be at fair market value. No attribution rules apply, meaning any capital gains or losses are realized and taxed to the party that sells or transfers the property.

Answer 54

For related parties, transfers are scrutinized for fairness. If transferred below fair market value, like giving a better deal to a spouse or minor child, the income or loss from the transferred asset may be attributed back to the transferor for tax purposes.

Answer 55

Transfer or loan of funds (money) or property by a taxpayer to their spouse or minor children that is then used to earn investment income. This could be interest income, dividend income, or capital gains. Transfer or loan of funds (money) or property by a taxpayer to a trust for which the spouse or minor children are beneficiaries or have a beneficial interest. • Transfer or loan of funds (money) or property by a taxpayer to a corporation in which the spouse or minor children have a direct or indirect interest. In all cases, the spouse or minor children will benefit in some form. So how can you reduce the risk of attribution occurring? One way is to use the "prescribed rate loan strategy"

Answer 56

• If the interest rate that is charged on the loan is the same or higher than the "prescribed rate" (an interest rate determined by CRA) AND the interest is paid within 30 days after the end of each year the loan is in place, THEN there is no attribution. Otherwise, attribution will occur.

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CY Bonus Flashcards

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