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CFP Exam Prep > Fundamentals of Financial Planning > Flashcards

Fundamentals of Financial Planning Flashcards

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1
Q

What are the 6 steps of financial planning process?

A
  1. Establishing client-planner engagement
  2. Gathering client data and determining goals and expectations
  3. Clarifying the client’s present financial status and identifying problem areas and opportunities
  4. Developing and presenting the financial plan
  5. Implementing the financial plan
  6. Monitoring the financial plan
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2
Q

Strategies to improve cash flow? This should focus on After-Tax income.

A
  1. Reduce discretionary expenses (for example, refinance high interest debt)
  2. Reorganize investments to produce highest possible after-tax income (for example, draw more from TFSA and non-reg IA etc.)
  3. Seek to increase income
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3
Q

How to calculate Gross Debt Service Ratio?

A

GDSR = (Mortgage Payments + Property Tax + Heating + 50% Condo fees) / Gross Family Income
This should not exceed 32%.

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4
Q

How to calculate Total Debt Service Ratio?

A

TDSR = (Mortgage Payments + Property Tax + Heating + 50% Condo fees + Other Debt Payments) / Gross Family Income
This should not exceed 40%.

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5
Q

What is Education Assistance Payment??

A

An EAP is the amount paid to a beneficiary (a student) from an RESP to help finance the cost of post-secondary education. The RESP provider reports EAPs in box 42 on a T4A slip and sends a copy to the student.

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6
Q

What changed after June 18, 2008 regarding EAP?

A

A beneficiary is entitled to receive EAPs for up to six months after ceasing enrolment.

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7
Q

What is the limit of EAP that can be paid out?

A

$5000 for the first 13 consecutive weeks of full-time studies in a qualifying educational program. After that, there is no limit. $2500 for part-time studies.

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8
Q

What is a specified RESP?

A

A specified plan is a single beneficiary RESP (non-family plan) where beneficiary is entitled to the disability tax credit. A specified plan cannot permit another individual to be designated as a beneficiary at year 37th.

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9
Q

What is the CESG and how long does the CESG continue?

A

20% of annual contributions for a beneficiary to a maximum CESG of $500 ($1,000 in CESG if there is unused grant room from a previous year), and a lifetime limit of $7,200.

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10
Q

What are the additional CESG tiers?

A

40% (extra 20% on the first $500), if family net income is $53,359 or less. 30% (extra 10% on the first $500), if family’s net income is more than $53,359 but is less than $106,717.

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11
Q

What is the deadline to start RESP and be qualified for grants?

A

Before the end of the calendar year in which the beneficiary turns 15 and made a $2000 contribution; or at least $100 contribution in any 4 previous years. Grants stop by end of the year beneficiary turns 17.

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12
Q

What is the maximum term of RESP?

A

35 years.

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13
Q

What happens to the RESP if beneficiary doesn’t go to post-secondary school?

A

Contributions are returned to subscriber, with any accumulated income payment (growth from the contributions) taxed. This can be avoided by contributing the AIP (to a max of $50k) to subscriber’s RRSP if there’s room. CESG is returned to government. Any non-education withdrawal from RESP will prevent the plan from being qualified for CESG for the next 3 years.

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14
Q

What if the AIP is not rolled into RRSP?

A

There is a deferral tax of 20% over and above a subscriber’s ordinary marginal tax rate. For example, if the subscriber were in a 30% tax bracket, the accumulated income would be taxed at approximately 50% if it were taken as a payment.

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15
Q

What is Canada Learning Bond?

A

Grant to help lower income families (net income below $53,359) start saving for their child’s post secondary education. $500 first payment, and $100 for every year after up to 15 years.

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16
Q

What is First time HBP?

A

You may participate in the plan if you (or your spouse) have not owned a home which you occupied as your principal place of residence in any of the past four calendar years. Each can withdraw up to $60,000.

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17
Q

What does repayment to RRSP for HBP begin?

A

5 years after the year of purchase, to a maximum of 15 years. For example, if A bought a home in 2024, she will have to start her repayment in 2029.

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18
Q

What is the limit to withdraw for Lifelong Learning Plan?

A

$10,000 a year, and not exceed $20,000 in a span of 4 years.

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19
Q

What happens when RRSP owner doesn’t finish the education program?

A

RRSP withdrawn is still considered to be under LLP if:

  • The student withdraws from the program more than three months after the year of the RRSP withdrawal;
  • Less than 75% of the student’s tuition is refundable as a consequence of leaving a program; or
  • The student enrolls in another qualifying educational program before April the year after RRSP withdrawal.
20
Q

What is LLP repayment period?

A

Repayment has to start no later than 60 days after year 5 since the first RRSP withdrawal under LLP. This repayment has to conclude within 10-year period. Repayment can also start early if RRSP owner doesn’t go to school for at least 3 months in 2 years. In that case, repayment starts 60 days after the 2nd year’s end.

21
Q

How to calculate elasticity?

A

Elasticity = % Change in Quantity Demanded / % Change in Price

22
Q

What are elastic, inelastic and unit elastic demand?

A
  • Elastic demand means a small change in price causes a large change in the quantity demanded.
  • Inelastic demand means a change in price causes a small change in the quantity demanded.
  • Unit elastic demand means the change in price causes an exact equal change in the quantity demanded.
23
Q

How to calculate GDP?

A 
GDP = C + I + G +  (X – M)
C: Consumer Spending
I: Business Investment
G: Government Spending
X: Export
M: Import
24
Q

Tell me about expansionary fiscal policy?

A

Designed to stimulate economy. ↑G or ↓T results in ⇒↑C and ↑I leading to ⇒↑GDP

25
Q

What about restrictive fiscal policy?

A

Aimed to slow down the economy. ↑T or ↓G results in ⇒↓C and ↓I leading to ⇒↓GDP

26
Q

What are the basic tools to carry out monetary policy?

A
  • Raising or lowering the discount interest rate
  • Raising or lowering the required reserve rate (RR)
  • Buying or selling government bonds and T-bills
27
Q

Tell me about expansionary monetary policy?

A

↑Ms results in ⇒↓interest rates and ↑I leading to ⇒↑GDP

28
Q

What about restrictive monetary policy?

A

↓Ms results in ⇒↑interest rates and ↓I leading to ⇒↓GDP

29
Q

What are the stages of a business cycle?

A

Peak –> Recession –> Trough –> Expansion –> Peak

30
Q

What are examples of leading indicators?

A

Housing stats, spot commodity prices, change in profits, average work hours per week etc.

31
Q

What are examples of coincident indicators?

A

GDP, industrial production, personal income, retail sales etc.

32
Q

What are examples of lagging indicators?

A

Business investment, unemployment rate, inventory levels, labor costs, inflation etc.

33
Q

What is term structure of interest rate or yield curve?

A

A graph that plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest. (Note that the chart does not plot coupon rates against a range of maturities – that’s called a spot curve.)

34
Q

How much does Assuris cover?

A

At least $200,000 for individual life insurance.
At least $60,000 or up to 85% of a health insurance.
At least $2000 a month or up to 85% of a disability payment and annuity payment.
RRIF is covered up to $100,000.
Each individual accumulation annuity is covered up to $100,000.
Each individual segregated fund is covered at least $60,000 or up to 85% if it’s more than $60k.

35
Q

How much does Canadian Investor Protection Fund cover?

A

All cash, margin account, option account are covered up to $1 mil.
Each RRSP, RRIF, Personal Holding Companies, Trust, Partnership and Association account is covered up to $1 mil.

36
Q

What are 4 unities for joint tenancy to exist?

A
  • Unity of interest (equal ownership)
  • Unity of title
  • Unity of possession (equal right to the property)
  • Unity of time (joint tenancy is created at the same time)
37
Q

Who would qualify for additional CESG?

A

Family earns less than $53,359: additional 20% of the first $500
Family earns between $53,359 to $106,717: additional 10% of the first $500
Family earns above $106,717: no additional CESG

38
Q

When someone purchases a new home due to having a family member being disabled, can they claim a FTHB tax credit?

A

Yes. The maximum claim is $5000, for a credit of $750.

39
Q

Who can participate in the FTHB?

A

In general, this is for people who never owned a home before; or homebuyers who have participated previously but have since paid off their FTHB loan, and not owned a home in the past 5 years.
This 5-year qualification test is waived if a new home is being bought for a disabled person.

40
Q

What happens if a RESP beneficiary doesn’t attend a post-secondary school?

A
  1. Contributions can be returned and investment income transferred to subscriber’s RRSP if there’s available contribution room.
  2. AIP can be withdrawn but will be taxed under subscriber + 20% penalty. CESG and CLB are returned.
  3. Funds (both contributions + investment return) can be transferred to beneficiary’s RDSP if they’re disabled. CESG and CLB are returned.
41
Q

Compare RESP and RDSP?

A

RESP vs RDSP

  1. Lifetime limit $50,000 vs $200,000
  2. Tax deductibility None vs None
  3. Contribution age deadline 32 or 35 for disabled vs 59 for RDSP
  4. Grants 20% CESG vs 100% 200% 300% up to $3500 yearly and $70,000 maximum lifetime
  5. Tax on wd Both are taxed on investment return
42
Q

How much would a RDSP receive in grant per year?

A 
- Family income less than $106,717:
300% on the first $500 contribution
200% on the next $1000 contribution
- Family income more than $106,717:
100% on the first $1000 contribution
Maximum $10,500 a year, and $70,000 lifetime.
43
Q

How much would RDSP receive in disability savings bond?

A
  • $34,863 or less: Bond $1,000
  • Between $34,863 and $53,359: Part of the $1,000 is based on the formula in the Canada Disability Savings Act
  • More than $53,359: No bond is paid
    Lifetime maximum bond is $20,000
44
Q

What are five key elements of valid contract?

A
  1. Valid offer
  2. Intention
  3. Consideration (i.e. exchange of value or money)
  4. Legal age
  5. Lawful object
45
Q

What are the reasons to void a contract?

A
  1. Under duress
  2. Breach of contract
  3. Misrepresentation
  4. Undue influence where one party is in a dominant position over the other
46
Q

What does tort law refer to?

A

It allows an injured person to obtain compensation from the party who caused the damage/injury.

CFP Exam Prep (7 decks)

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