PERSONAL FINANCE – FINA200

PERSONAL FINANCE – FINA200

Mini-Case A:

We are now October 2016. This has been a big year for Sam as he turned 19 years old on January 1, 2016 and finished his first year at Concordia in April 2016 (Fall 2015 term and Winter 2016 term), and just moved out of his parent’s home into an apartment that he rents with his buddy, Joe. Sam has been working part-time since he was 17 years old.

Additional information:

• Sam’s salary in 2014 (age 17) was $5,000
• Sam’s salary in 2015 (age 18) was $6,000
• Sam’s salary in 2016 (age 19) is $10,000

Question 1: (8 marks)

Sam has questions on his RRSP’s and on RRSP’s in general. 

1. Sam wants to know what the advantages are to making an RRSP contribution; give 2 advantages.

(2 marks)

• Sam wants general information on RRSP’s. (2 marks):
  • What is the RRSP contribution limit for 2016? (.5 mark)

• If you have earned income, at what age can you start to contribute to an RRSP?

(.5 mark)

• If you have earned income, what is the maximum age you can contribute to an RRSP?

 (1 mark)

• When is the contribution deadline for making a 2016 RRSP contribution? (.5 mark)

• Sam has never made an RRSP contribution before but is looking to contribute the maximum to his RRSP in 2016. He is going to the Bank of Montreal tomorrow where he will open an RRSP account. Sam knows that he could look on his 2015 Notice of Assessment to figure how much he could contribute to his RRSP but prefers that you calculate the maximum amount that he could contribute to his RRSP based on his prior years. Show Sam all of your calculations. (1.5 marks)

• Sam is looking to be strategic in his RRSP planning and has decided to contribute over the maximum RRSP contribution limit by $2,000. (1 marks)
  • Can he do so without incurring a penalty, yes or no?  (.5 mark)

• Explain. (.5 mark)

• Just as Sam was going to make his RRSP contribution with his savings, Sam heard about a Tax-Free Savings account TFSA). As he is looking to put a down payment on a new car with these savings in one year, he is wondering if it is best for him to put his money into an RRSP and withdraw it in one year or put the money into a TFSA instead and withdraw that in one year’s time. (1 marks)
  • Explain to Sam what a TFSA is. (.5 mark)

• Make your recommendation to Sam on whether he should contribute to his RRSP or TFSA knowing that he is looking to withdraw the money in one year for his car. Explain your reasoning. (.5 mark)

Question 2: (6.5 marks)

Joe works full-time and has been doing so for the last three years, earning the same yearly salary of $86,000. This year, he is thinking of making an RRSP contribution of $6,000 but would like to understand the tax savings that will occur by doing so. Using Table A at the end of the Case, calculate the taxes payable under the two scenarios: Scenario 1 with no RRSP contribution and Scenario 2 whereby Joe makes a $6,000 RRSP contribution. Use the following template for your response.   (4.5 marks)

1. What is Joe’s benefit (tax savings) if he made a $6,000 RRSP contribution?

Hint: Difference between (A) and (B) in the taxes calculated above. (.5 mark)

• For this $6,000 RRSP contribution, Joe is considering two options (1.5 marks):
• Option 1: Joe is thinking of making a lump sum $6,000 annual contribution on each December 31st for the next 50 years, making an annualize return of 4%, how much would he have accumulated for his retirement? (.5 mark)

• Option 2: Joe is considering making a monthly RRSP contribution of $500 at the end of each month in his RRSP, for 50 years, making an annualized return of 4%, how much would he have accumulated for his retirement? (Hint: TMV variables must be monthly) (.5 mark)

• Which option do you suggest that Joe make and why? (.5 mark)

Mini-Case B:

Laura is a resident of Quebec. She works full-time and is a part-student at Concordia. Laura filed her 2015 personal income tax return for the first time and just received her Federal Notice of Assessment from the Canada Revenue Agency (CRA). The Notice states that she did not file her personal tax returns correctly with regards to the non-refundable tax credits claimed.

Laura’s information for 2015:

• Annual Gross Salary $65,000
• Annual Deductions at Source (withholdings made by Laura’s employer)
  • Federal withholding taxes $10,000
  • Annual Maximum Quebec Pension Plan (QPP) contribution
  • Annual Maximum Quebec Parental Insurance Plan (QPIP)
  • Annual Maximum Employment Insurance (EI) premium
• Medical Expenses of $5,000 for her medication
• Charitable donations: $200 Terry Fox Foundation and $250 for Starlight Children’s Foundation
• Bus pass for 12 months at a cost of $100/month
• Tuition: $1,500 part-time for 4 months (Fall 2015 term)
• Purchased her first home for $150,000
• Interest paid on a student loan for when she was a full-time student $100

Question 3: (10 marks)

Laura knows how important Federal Non-Refundable Tax Credits are and that most taxpayers miss out on these important tax credits that reduce your taxable income. Use the following template to determine how you would have filed Laura’s Federal Non-Refundable Tax Credits and what she would have been entitled to for 2015 (i.e. line 350 of Schedule 1 in the T1 General Income Tax Return (Federal)).  Visit the CRA website for further information (also refer to Exhibit 3-6b in your online textbook but be careful, the rates have changed from 2013 to 2015). Use the following template for your response. 

Question 4: (1.5 marks)

Laura loves her iPhone and decided to purchase shares in Apple. In September 2014 she bought $2,000 of Apple shares, just at the launch of the iPhone 6. A year later in September 2015, Laura decided to sell all her Apple shares when the shares were valued at $3,000. Laura had heard that capital gains are taxed at 50% but is not sure if she reported the correct amount on her 2015 personal income tax return. All amounts are in Canadian dollars.  

1. Calculate Laura’s capital gain: (.5 mark)

• Calculate Laura’s taxable capital gain: (.5 mark)

• Which amount should Laura enter on her 2015 personal income tax return (line 127)? (.5 mark)

Mini-Case C:

Question 5: (4 marks)

Linda knows that goal setting is central to financial decision-making and that it is the basis for planning, implementing and measuring progress. In order for her goals to have meaning, the goals should be SMART. Determine below which goals are SMART. Use the following template for your response. 

TABLE A

TABLE B

Time Value:

FV = Future value

PV = Present value

PMT = PMT or regular annuity

i = Annual interest rate

n = Number of time periods

When compounding is more than once a year,

FV = PV (1 + i/m)^nm

m = Number of compounding periods per year

Solution.

PERSONAL FINANCE – FINA200