Questions Flashcards
Jennifer owns $27,000 worth of shares in her employer that is held within a Deferred Profit Sharing Plan (DPSP). She is concerned about the sustainability of this account given the financial difficulties the company is having. What options does she have available to her to avoid losing the money invested on her behalf in this account?
A. Withdraw the funds in her DPSP under the Home Buyers Plan (HBP)
B. Make additional contributions to her DPSP and buy other investments to diversify her holdings
C. Jennifer could transfer the funds from her DPSP to a personal RRSP and avoid an immediate tax liability.
D. Request a payout of the DPSP funds, which will not create a tax liability for her
A. Incorrect. She cannot participate in the HBP through her DPSP directly. She must first transfer the funds to a personal RRSP and then participate in the HBP.
B. Incorrect. Employees are not allowed to contribute to a DPSP.
C. Correct. Because a DPSP is a registered account and contribution to it from an employer use up RRSP contribution room, these funds can be transferred to an RRSP without any tax consequences.
D. Incorrect. Because the funds are registered she would have to pay taxes on any withdrawal.
Based on Becky and Izzy’s mortgage statement, their bank advised them that if they were to break their mortgage, they would be required to pay an interest rate differential penalty of $4,128. How does their bank calculate the interest rate differential that it charges to clients that cancel their mortgage before maturity? Select the calculation methodology that would be used by the bank:
A. Outstanding Mortgage Balance x Differential Rate (Current Mortgage Rate - New Mortgage Rate)
B. Outstanding Mortgage Balance x Differential Rate (Current Mortgage Rate - New Mortgage Rate) x Time Remaining in Existing Mortgage Term
C. Outstanding Mortgage Balance x Differential Rate (Current Mortgage Rate - New Mortgage Rate) x Time Remaining on Amortization”
D. Interest Rate Differential is calculated based on a predefined rates that are different from bank to bank
A. Incorrect. This formula fails to multiply the result by the time remaining on the existing mortgage
B. Correct. This formula is the one used by bank to calculate the penalty on breaking a mortgage using the Interest Rate Differential (IRD) methodology.
C. Incorrect. This formula incorrectly uses amortization remaining instead of the term in years remaining
D. Incorrect. The penalty amount is not pre-defined by the bank
Kevin, an environmental lawyer working in Calgary, would like to reduce the amount of tax paid each year. His wife, Brenda, works as administrative assistant at a marketing firm. They have a 7-year-old boy. Kevin discussed with his financial planner about how he should split income with Brenda. Which of the following techniques would the financial planner recommend Kevin?
- Pay a full-time salary to Brenda
- Pay allowance to their child
- Contribute to Brenda’s RRSP
- Buys stock in name of their child
A. 3 and 4 only
B. 2 and 3 only
C. 1 and 3 only
D. 1 and 2 only
A. Correct. Option 3 is correct. Contributing to Brenda’s RRSP will her to receive a refund with no income attribution back to Kevin. Option 4 is correct. Buying stock in name of their child will allow for capital gains to be taxed in his children’s hands.
B. Incorrect. Option 2 is incorrect. Paying an allowance to a child will result in attribution rules taking effect, causing the income earned to be taxed in Kevin’s hands. Option 3 is correct. See explanation for Answer A.
C. Incorrect. Option 1 is incorrect. Paying a salary to Brenda will lead to income being attributed back to Kevin. He doesn’t have a business and it would be hard for him to justify the need of a salary to his wife. Option 3 is correct. See explanation for Answer A.
D. Incorrect. Option 1 is incorrect. See explanation for Answer C. Option 2 is incorrect. See explanation for Answer B.
