Practice Exam Points

Question 1

What are some benefits of doing a pension buyback?

Answer 1

1. Increases pension benefits and thus their size of the guaranteed pension option upon retirement
2. Could qualify for an unreduced pension at an earlier age, especially if client indicated they would like to retire sooner
3. Allows them to benefit from employer matching, which doesn’t happen with personal RRSP

Question 2

What are some negatives of a pension buyback?

Answer 2

1. PB are not guaranteed, it can become underfunded
2. Reduces flexibility with funds
3. Creates overreliance on one retirement income resulting in less flexibility in retirement
4. PSPA will reduce RRSP cont room creating reliance on one form of retirement income

Question 3

Students needs to know the Benefits of DBP plans

Answer 3

Know the:
-opportunities afforded to plan member
- various strategies
- rules for PAs and RRSP conts

Question 4

Weak on / NEED TO KNOW
Capital Needs Analysis - Compare capital needs upon death with existing assets and life insurance in place

Insurance Needs Analysis

Question 5

When asked about life insurance amount do you include CSV?

Answer 5

NO

Question 6

What are Capital Assets? Come back to this…

Question 7

What are some cons of having your Estate as the beneficiary?

Answer 7

Can tie up funds
Goes through probate

Question 8

What are some ways to reduce income taxable on a terminal return?

Answer 8

• Executor could elect to roll over RRSP proceeds to the spouse
• If the deceased has unused contribution room and a spouse executor can elect to make a SPL cont
• Apply any unused net capital loss carryforward against income in year of death
• Executor can report certain types of income earned but not yet received through a separate Rights and Things return

Question 9

Business and Overhead Disability Policy

Answer 9

Only covers staff payroll and office expenses

Question 10

Long Term Disability Insurance

Answer 10

Requires you not be able to perform 2 of 5 activities of daily living

Question 11

What is a Swap?

Answer 11

A form of a derivative contract

Question 12

The closer to Beta 1

Answer 12

The Less the tracking error
- index mutual fund has a beta >1
- EFT index has a beta < 1

Question 13

How do you calculate a portfolios “Risk Adjusted Return”?

Answer 13

Two common methods are:

1. Sharpe Ratio / USE 9.3% - uses standard deviation
   = (YTD Return - Risk Free Rate ) / 9.3%
2. Treynor Ratio / USE .92 - uses Beta
   = (YTD Return - Risk Free Rate) / .92

These two calculations are the SAME except they differ by their Divider

The Higher the answers the more desirable the fund

Question 14

What is a strategy with converting common shares to preferred shares

Answer 14

• Defers an immediate tax liability
• Preferred Shares can pay dividend income
• voting features maintain control
• heirs benefit from company growth when parent converts to PS

Question 15

IPP feature

Answer 15

Must be 45 plus in age

Question 16

How much tax is paid on RCA contributions?

Answer 16

50% , meaning only half amount of the capital is available for future growth
- can “supersize” a pension fund
- idea for high income earners
- they do not generate a PA (pension adjustment)

Question 17

Basic Federal Tax Summary:

Answer 17

1. EMPLOYMENT INCOME
   + investment income
   + professional income
   + business income
   + all other income (rental, spousal)
   = TOTAL INCOME

• ALLOWABLE DEDUCTIONS (think RRSP conts, child care exp)
• ADDITIONAL ALLOWABLE DEDUCTIONS (ie. non-capital losses)

= TAXABLE INCOME

Question 18

How do you calc the Dividend Tax Credit?

Answer 18

1. Know if its an eligible (38% gross up) or ineligible dividend (15% gross up)
2. multiply dividend by gross up (1.38 or 1.15) - if you have both kinds of dividends add them together
3. Multiply this grossed up number by the clients tax rate (say 33%), then you get the tax on that income eg. $8,000
4. then multiply each by their tax deduction rate, use this number (say $3000) and go $8000-3000 = NET tax liability

Question 19

What are candidates expected to know?

Answer 19

The Federal Tax Bracket Rates:
2023
15% up to $53,359 of taxable income
20.5% between $53,359 and $106,717
26% between $106,717 and $165,430
29% between $165,430 up to $235,675
33% on any amount taxable income exceeding $235,675

BC
5.06% up to $45,654 of taxable income
7.7% between $45,654 and $91,310
10.5% between $91,310 and $104,835
12.29% between $104,835 and $127,299
14.7% between $127,299 and $172,602
16.8% on any amount exceeding $172,602 and $240,716
20.5% on any taxable income exceeding $240,716

Question 20

If asked to Calc tax payable and after tax amounts always use

Answer 20

the Marginal Tax Rate! (used for investment, dividend income, interest, capital gain OR income from a trust)

Question 21

What is the most tax-efficient way to someone to maximize their after tax proceeds on eventual sale of their company?

Answer 21

A: Exchange their shares for voting preferred shares and issue new common shares to the children (this will freeze the amount of capital gains in owners hands today at current levels and issuing new CS to children will allow them to use the LCGE on their eventual share disposition)

Other info:
-Lending money to your wife / children at prescribed rate to purchase shares will transfer assets to kids/wife an allow future growth in their hands… however, owner will be taxed on the interest income he receives from their prescribed rate

Question 22

What does an Estate Freeze entail?

Answer 22

Allows you to avoid any income tax (prescribed rate loan produces income tax) and retain some control over the business through preferred shares that have a fixed value. The previous common shares are issued to the family member you wish to take over the company. It “freezes” the current value of the company through your PS and future growth is in the hands of the CS holders.

Question 23

What does gifting shares of a company you own to a trust with children and wife as bene’s do?

Answer 23

It causes an immediate disposition of shares and tax would be due on any capital gain amount realized in excess of the LCGE on current year tax filing

Question 24

What does transferring shares of your personal Company to an alter ego Trust and naming wife / children as bene’s do?

Answer 24

Transferring to an Alter Ego Trust (to a spouse) does allow for it to go over at your ACB , thus deferring the tax liability, you cannot use the beneficiaries LCGE with the use of this kind of trust.

Question 25

What is CNIL?

Answer 25

What is CNIL and how does it work?

Your cumulative net investment loss (CNIL) for your investment income or investment expenses. Your CNIL is how much more your investment expenses were, compared to your investment income.

CNIL Balance lowers your LCGE amount

Receipt of dividend income will reduce your CNIL balance and thus increasing your LCGE amount

Question 26

How many years can a shares loss be carried back?

Answer 26

3 years (Say your ACB is $90,000 and your MV is $30,000… your “capital loss” would be 30,000-90,000 = -60,000 / 2 = $30,000 CAPITAL LOSS.. always use 50% of the capital loss.

If you have a capital loss and a capital gain the same year it would be the difference x 50% between them both. Loss/Gain netted out.

Loss or Gain, calc the difference and divide by 2.

Question 27

What is Retiring Allowance Rollover?

Answer 27

DO NOT ANSWER as is ceased in 1996

Question 28

Dying intestate means?

Answer 28

Dying without a Will

Question 29

Family wills?

Answer 29

No such thing, each individual needs their OWN will - invalid will if “joint”. The only thing is a “mirrored will” meaning both are identical

Question 30

Holographic wills need to be

Answer 30

Either hand written by the person (aka testator) and not signed

or

Typed but signed AND witnessed. Typed wills without a witness are invalid immediately

Question 31

Some advantages of individual security positions portfolio (not funds) - like our portfolio vs an ETF or mutual fund

Answer 31

PROS
- transparent holdings
- well diversified
- can be consistent with client wishes
- can achieve good ROR usually

DISADVANTAGES:
-can require more monitoring than a fund if client investor knowledge is low compared to a fun
- volatility

Question 32

Some advantages of MF portfolio

Answer 32

PROS
- consistently rebalanced and monitored by professionals
- a hands off approach
- can be well diversified

CONS
-trailer fees, less transparent fees
- can be more expensive

Question 33

Some advantages of Seg Fund portfolio

Answer 33

PROS
- diversified
- principal carries a maturity guarantee
- hands off approach/ ran by pros / regular rebalancing
- high income (bond port) can mean less volatile

CONS
- potenitally higher fees
- like a MF with an insurance wrapper

Question 34

What are the 3 Asset Allocation Strategies?

Answer 34

ASSET ALLOCATION STRATEGIES: Strategic, Tactical and Dynamic

Strategic: set your current AA and rebalance periodically to maintain weightings. Akin to buy and hold. It is disciplined. Prevents movements from greed and fear. Criticized for being “too rigid”

Tactical: A more tactical approach than Strategic that allows for deviation when the market allows it or an opportunity presents itself. Requires marketing timing and experience in the market. Predicts and is used in SHORT term movements in market.

Dynamic: Continually adjust asset allocations in flux with the market. Requires market expertise and knowledge. Differently from TAA, DAA “tilts” for the medium term to shift not just short term.

Question 35

Registered Annuities Vs Non Red

Answer 35

• if you purchase an annuity using reg funds it is a registered annuity, this means both principal and interest is subject to tax
• if you purchase a non-reg annuity (eg you sell your home and use the proceeds to purchase an annuity) only the interest portion of the payment is subject to tax
• normal annuity payments are made up of interest and principal payments - interest payments in the beginning are quite large and lower as the annuity continues on. Over time the interest portion gets smaller and principal portion gets larger, this means you would face a larger tax burden in the early years and lower one in the later years
• if you buy a PRESCRIBED annuity vs a normal annuity the tax payments would be level throughout the lifetime of the annuity, leveling out the long term tax burden
• Straight line annuities end at death and no value to heirs, END AT DEATH

-Fixed term have lower payments than straight life but could have something left for heirs in estate

If a client wants a “stable and consistent income scream” you should use the funds to purchase a non-reg annuity

If a client wants to leave a big estate for family you should suggest a Fixed term annuity guarantee

Question 36

Who are annuities acceptable for?

Answer 36

• If you investments don’t provide enough monthly income
• Low risk tolerance individuals
• Not interested in managing investments
• Wanting control over timing of regular income payments
• Long life expectancies, clients with poor health and short life prospects an annuity is bad choice
• Not for someone who wants to leave an estate/legacy

Question 37

Who are annuities not suitable for?

Answer 37

• people wanting to control their investments
  -ppl wanting to leave an estate
• ppl with short life expectancies
• ppl with high risk tolerance
• ppl with low income requirements

Question 38

Spousal RRIF attribution only applies if?

Answer 38

The 3-year attribution rule doesn’t apply to the minimum amount of a RRIF payment, but would apply for any amount over the minimum. Otherwise, withdrawal rules for a spousal RRSP are the same as a regular RRSP.

Question 39

How do you calculate a portfolios risk adjusted return?

Answer 39

Sharpe Ratio or Treynor Ratio

Sharpe Ratio uses Standard deviation as its risk measure

Treynor Ratio uses Beta as it’s risk measure.

For both formulas you take

( YTD ROR - RISK FREE RATE ) / BETA OR SD