Financial Management Flashcards
In which situations should you contribute to an RRSP vs. paying down your mortgage?
Financial planners have debated the RRSP vs. mortgage issue at great length and have developed rules of thumb to help with the decision:
- Pay the mortgage if the interest rate exceeds the return on the RRSP
- Contribute to the RRSP if the individual does not have a good pension plan
- Pay the mortgage if the individual is uncomfortable owing money
How do you calculate the after-tax return on an RRSP contribution?
iat = [ibt × (1 - MTRw)] ÷ (1 - MTRc)
where:
ibt = the before-tax return
iat = the after-tax return
MTRc = the MTR when deducting the contribution
MTRw = the MTR when withdrawing the funds
What is the Home Buyer’s Plan (HBP)?
The Home Buyer’s Plan allows the participant (and spouse) to withdraw $35k tax-free from their RRSPs for use of a down payment to buy or build a qualifying home. They must not have owned a home in the past 4 calendar years.
This amount must be paid within 15 years max, and if unpaid, the payment amount will be included in their income for that taxation year.
The payment period starts 2 calendar years after the year of withdrawal, or within the first 60 days of the third year.
(eg. borrowed 2019 –> payments start 2021, but can be paid until the first 60 days of 2022 designated for the 2021 year).
What are some timing issues to consider for the HBP?
- The taxpayer cannot use the HBP if the taxpayer or spouse already owned the qualifying home more than 30 days before the date of the withdrawal
- The taxpayer has to buy or build the qualifying home before October 1st of the year after the year of the withdrawal
- The taxpayer can borrow funds under the HBP if funds were contributed to the RRSP at least 90 days before the withdrawal date
What are some tax benefits for students?
- Tuition tax credits not used by the student (up to $5,000) may be transferred to a supporting parent/grandparent/spouse
- Tuition tax credits may be carried forward indefinitely BUT cannot be transferred to anyone once elected to do so
- Interest credits for the interest portion of payments made to government student loans, eligible to be carried forward up to 5 years
- Childcare expense deduction incurred to pursue FT education can be claimed only by the lower-income spouse, up to:
$8k for children under 7yo ($175/week of study)
$5k for children 7yo - 16yo ($100/week of study)
$11k for those eligible for the DTC ($250/week of study) - Childcare expense deduction incurred to pursue PT education can be claimed by the working spouse; the lesser of
Actual expenses
2/3 of working spouse income
$175/month for children under 7yo, $100/month for children 7-16, $250/month for children eligible for the DTC
What are the contributions limits for RESPs?
The lifetime contribution limit for any one beneficiary is $50,000
Annual CESG-eligible contributions are limited to $2,500/year, up to $5,000 if the beneficiary has carry-forward room
How are Additional CESGs calculated?
Additional CESGs will be made on the first $500 contributed to an RESP, at a rate of
40% ($200) for net family income $50,197 or less
30% ($150) for net family income from $50,197 - $100,392
20% ($100) for net family income greater than $100,392 –> same rate as the basic CESG
How does the Lifelong Learning Plan (LLP) work?
The LLP allows a participant enrolled in a qualifying educational program at a designated educational institution full-time to loan $10,000 from their RRSPs in a calendar year, to a lifetime total of $20,000.
This amount must be repaid starting the earlier of the 5th year since first withdrawal or second consecutive year the student cannot claim the full-time education amount for at least 3 months each year.
The instalment payments must be made in 10 years once started, shortened if died, non-resident, or reaches 72.
What is the Canada Child Benefit?
The CCB is a non-taxable monthly payment made to eligible families to help them with the cost of raising children under 18.
To qualify, you must file a tax return annually and be a citizen/PR while resident and supporting/living with the child.
The max amounts will be $569.41/mth for <6yo, $480.41/mth for 6-17yo.
How does the reduction of the CCB work?
A reduction in the payment will occur from adjusted family net income (AFNI) from $32,797 - $71,060, of
1 eligible child - 7% the band ($2,678 total), plus 3.2% greater than $71,060
2 eligible children - 13.5% the band ($5,166 total), plus 5.7% greater than $71,060
3 eligible children - 19% the band ($7,270 total), plus 8% greater than $71,060
4+ eligible children - 23% the band ($8,801 total), plus 9.5% greater than$71,060
What is the Gross Debt Servicing Ratio (GDSR) and Total Debt Servicing Ratio (TDSR)?
The GDSR/TDSR are used to determine your affordability for a house - should NOT exceed 30-32% of your gross income.
GDSR takes into consideration mortgage payment, property taxes, utilities, and 50% condo fees.
TDSR adds other debt to GDSR.
What is the prepayment penalty for mortgages?
Prepayment penalty is higher of 3 months’ interest or IRD.
IRD: (Your rate - current rate) x (Outstanding balance) x (Remaining months/12)
What is the yield for a T-Bill?
CDN: [(Par Value - Price)/Price] x (365/Term) x 100
USD: [{Par Value - Price)/Price] x (360/Term) x 100
How do you calculate the before-tax rate of return to cover an interest debt?
Rbt = i / (1 - reff)
Where Rbt = Rate of return (before taxes)
i = nominal interest rate/debt interest rate (annual)
reff = effective interest rate
What are pro forma financial statements?
Pro forma financial statements show projections based on certain assumptions.
