Participant's Workbook - Solutions

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Concordia University *

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Feb 20, 2024

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©IQPF Participant’s Workbook 132 PART 3: Learning activity solutions Introduction Module 1. The following steps should be carried out in the presence of your client: Explain the role of the financial planner and the value of the financial planning process Define the terms of the engagement Determine the client’s goals, needs and priorities Compile and present recommendations and the supporting rationale Discuss implementation actions, responsibilities and time frames Implement the recommendations 2. Please see Module 1, The Integrated Personal Financial Planning Process, for information about the professional service contract. A. False. A client can break a contract at any time and does not need a serious reason. It is the financial planner who cannot terminate a contract with a client except for a serious reason. B. False. The financial planner cannot include a clause in the contract guaranteeing the results of their recommendations. Furthermore, they should even disclaim responsibility in this regard. C. True. Section 17 of the Regulation respecting Firms, Independent Representatives and Independent Partnerships, CQLR, c D-9.2, r. 2, identifies the documents that must be in a client file and subsection 10 is of particular interest for financial planners, since it stipulates that the client’s file must include a copy of the financial planning contract signed by the client and a copy of the written report that the financial planner is obliged to give the client. D. True. An estimate of the number of hours to carry out the contract is one of the things that must be included in the professional service contract, according to section 8 of the Regulation respecting the Pursuit of Activities as a Representative. E. False. The documents in the client’s file can be viewed by the client . 3. Name the five steps of a standard problem-resolution process and state those carried out in the analysis step. 1) Review of the goals expressed by the client 2) Assessment of the current situation based on the documentation provided 3) Quantification of the differences 4) Evaluation of the feasibility and potential achievement of the target goal 5) Identification of solutions . Points 2 to 5 lead to three orders of findings to be included in the “Analysis” section for each situation in the integrated personal financial planning report. Six situations must be analysed for a full portrait of a person’s or family’s financial situation.

©IQPF Participant’s Workbook 133 Case Study 02 – William and Sandra Bilan personnel – Notes personnelles Section: Assets Question 3 (Part 7) What is the value of Sandra’s RPP to enter in the balance sheet? BGN 2,434.40 Accrued pension indexed (inflation) to age 65 already calculated 1.96 [(1 + 0.04) ÷ (1 + 0.02)] – 1 27 92–65 (life expectancy – age of retirement) 0 –$51,655.94 51,655.94 0 4 Rate of return on long-term portfolio 37 65–28 (age of retirement – current age) –$12,103 It is also possible to not calculate the amount of the pension benefits at 65 and instead use a corrected discount rate to determine the value of the pension benefits at age 65 on the date of the balance sheet. BGN 1,170 Accrued pension 1.96 [(1 + 0.04) ÷ (1 + 0.02)] – 1 27 92–65 (life expectancy – age of retirement) 0 –$24,826.41 24,826.41 0 1.96 [(1 + 0.04) ÷ (1 + 0.02)] – 1 37 65–28 (age of retirement – current age) –$12,106 Note: The difference between the two results is because the corrected rate is rounded to two decimal places.

©IQPF Participant’s Workbook 134 Question 3 (Part 8) What values should be entered in Sandra and William’s personal balance sheet for their QPP pensions? Sandra BGN 6,660.40 Accrued pension indexed (MPE) to age 65 already calculated 1.96 [(1 + 0.04) ÷ (1 + 0.02)] – 1 27 92–65 (life expectancy – age of retirement) 0 –$141,320.41 141,320.41 0 4 Rate of return on long-term portfolio 37 65–28 (age of retirement – current age) –$33,111 It is also possible to not calculate the amount of the pension benefits at 65 and instead use a corrected discount rate to determine the value of the pension benefits at age 65 on the date of the balance sheet. BGN 2.231 Accrued pension 1.96 [(1 + 0.04) ÷ (1 + 0.02)] – 1 27 92–65 (life expectancy – age of retirement) 0 –$47,339.93 47,339.93 0 0.97 1, 1, +0.03, 1 37 65–28 (age of retirement – current age) –$33,122 Note: The difference between the two results is because the corrected rate is rounded to two decimal places.

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©IQPF Participant’s Workbook 135 William –2.138 Accrued pension 3 Assumption for MPE rate of increase. 38 65–27 (age of retirement – current age) 0 $6,573.89 BGN 6,573.89 Accrued pension indexed (MPE) to age 65. 1.67 [(1 + +0.037) ÷ (1 + 0.02)] – 1 25 90–65 (life expectancy – age of retirement) 0 –$135,687.95 135,687.95 0 3.7 Rate of return on long-term portfolio 38 65-27 (age of retirement – current age) –$34,115 It is also possible to not calculate the amount of the pension benefits at 65 and instead use a corrected discount rate to determine the value of the pension benefits at age 65 on the date of the balance sheet. BGN 2.138 Accrued pension. 1.67 [(1 + 0.037) ÷ (1 + 0.02)] – 1 25 90–65 (life expectancy – age of retirement) 0 –$44,129.27 44,129.27 0 0.68 [(1 + 0.037) ÷ (1 + 0.03)] – 1 38 65–27 (age of retirement – current age) –$34,110 Note: The difference between the two results is because the corrected rate is rounded to two decimal places.

©IQPF Participant’s Workbook 136 Question 5 (Parts 1 and 2) Net value of family residence. Total William Sandra Market value $370,000 $185,000 $185,000 Less: Mortgage $177,874 $88,937 $88,937 Credit cards $3,250 $5,980 Net worth $92,813 $90,083 Question 6 (part 1) Partition of family patrimony for non-registered assets Family residence Total William Sandra Market value $370,000 $185,000 $185,000 Less: Mortgage $177,874 $88,937 $88,937 Credit cards $3,250 $5,980 Net worth $92,813 $90,083 Deduction for contribution with an asset received by gift Gift $6,000 Increase in value: [$370,000 – $220,000] ÷ $220,000 = 68.18% $4,091 Deduction $10,091 Partitionable value of the residence $92,813 $79,992 Other assets included Furniture $1,600 $800 $800 Car (exclude gift car) $0 $0 Partitionable value – Non-registered assets $93,613 $80,792 $174,405 Calculation of the family patrimony debt for the non-registered assets William Sandra Value to attain ($174,405 ÷ 2) $87,203 $87,202 Less: Partitionable value $93,613 $80,792 Creditor (debtor) amount ($6,410) $6,410

©IQPF Participant’s Workbook 137 Question 6 (part 2) Partition of the family patrimony for deferred tax plans William Sandra Partitionable value – RPP $28,268 $12,103 Total partitionable value $40,371 Value to attain $20,185 $20,185 Less: Partitionable value $28,268 $12,103 Creditor (debtor) amount ($8,082) $8,082 Note: QPP earnings will be partitioned directly by Retraite Québec. Question 7 Who would be the family patrimony creditor (for all the assets) if the partition were carried out due to the death of one of the spouses and what would be the amount of the debt? Family residence Total William Sandra Market value $370,000 $185,000 $185,000 Less: Credit cards $3,250 $5,980 Net worth $181,750 $179,020 Deduction for contribution with an asset received by gift Gift $6,000 Increase in value: [$370,000 – $220,000] ÷ $220,000 = 68.18% $4,091 Deduction $10,091 Partitionable value of the residence $181,750 $168,929 Other assets included Furniture $1,600 $800 $800 Car (exclude gift car) $0 $0 Partitionable value – Non-registered assets $182,550 $169,729 $352,279 William Sandra Value to attain ($352,279 ÷ 2) $176,140 $176,140 Less: Partitionable value $182,550 $169,729 Creditor (debtor) amount ($6,410) $6,410

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©IQPF Participant’s Workbook 138 Activity – Cost of Living Question 1 How long will it take for William to pay off his credit card? Answer: 4.87 months 3,250 0 19.9 [P/Y] \P/Y\ 12 \C/Y\ 12 [QUIT] –700 4.87 months William is making monthly payments (\P/Y\ = 12) and credit card interest is capitalized monthly (\C/Y\ = 12). The solutions shown use the calculator’s secondary function [P/Y], which allows you to avoid manipulating the interest rate (I/Y) to match the frequency of the payments (\P/Y\) and the frequency of interest capitalization (\C/Y\). Question 2 How long will it take for Sandra to pay off her credit card? Answer: 5.24 months 5,980 0 19.9 [P/Y] \P/Y\ 12 \C/Y\ 12 [QUIT] –1,200 5.24 months

©IQPF Participant’s Workbook 139 Question 3 How much additional money will be available monthly once the credit cards are paid off and the monthly expenditures have been increased by $600? Answer: $1,300 The couple is spending $1,900 each month to pay off their credit cards, which will then be available each month for other purposes, including the planned spending of an additional $600 each month. This will leave them $1,300 each month. Conclusion In five months, William and Sandra will be able to save $1,300 per month. Question 4.1 In three years, what will be the price of a car like the $25,000 car William and Sandra have their eye on now? How much will they have to save each month to buy, three years from now, a car that is worth $25,000 today? Answer: $26,530 –25,000 0 This is not an annuity. 2 The inflation assumption is 2%. 3 Number of periods (years). $26,530 Question 4.2 How much will they have to save each month to buy, three years from now, a car that is worth $25,000 today? Answer: $845.16 0 26,530 31 (3 × 12) – 5 Beginning in five months 1 [P/Y] \P/Y\ 12 \C/Y\ 12 [QUIT] Short-term return, net of fees: 1%, capitalized (\C/Y\) 12 times a year. Monthly payments (\P/Y\). $–845.16

©IQPF Participant’s Workbook 140 Question 5 How much will be available monthly to create an emergency fund and possibly save toward retirement? Answer: $454.84 $1,300 – $845.16 Question 6 Since saving up to buy a car is a recurring expense, what will William and Sandra’s annual cost of living be once their credit cards have been repaid? Answer: $74,793 Their current cost of living is $57,451 and we have to add $7,200 ($600 a month) for the increase in discretionary spending and $10,142 ($845.16 a month) to save for the car. Question 7 What is William’s available income (income after income taxes, social charges and savings)? What is Sandra’s? Answers: William: $36,800; Sandra: $43,451 William Sandra Salary $48,550 $50,550 Salary $65,000 Kilometrage allowance $2,000* Less: Less: Income taxes $8,478 $13,750 Income taxes $13,791 $21,549 Social contributions $3,330 Social contributions $3,858 RRP contributions $1,942 RRP contributions $3,900 Available income $36,800 Available income $43,451 * $4,000 km per year at a rate of $0.50/km.

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©IQPF Participant’s Workbook 141 Question 8 What are the couple’s debt ratios (GDS and TDS)? Answer: GDS = 15%; TDS = 27% The gross debt service ratio (GDS) is mainly used for residential mortgages, since it represents the ratio between expenses related to housing and the borrowers’ gross income. It is calculated as follows: + + + + 50% $12,460 + $3,488 + $1,220 $48,550 + $65,000 = 15% The total debt service ratio (TDS) considers not only expenses related to housing but also the repayment of the borrower’s other debts. Since this ratio is generally calculated by financial institutions before granting a new loan, the calculation considers the minimum repayment on all authorized credit and not just the credit in use at the time of the loan. Authorized credit: $15,000 + $20,000 + $2,000 = $37,000 Minimum repayment: $37,000 × 3% = $1,110 per month or $13,320 per year + + + + 50% + $12,460 + $3,488 + $1,220 + $13,320 $48,550 + $65,000 = 27%

©IQPF Participant’s Workbook 142 Activity – Emergency Fund Question 1 How long will it take for William and Sandra to accumulate their $15,000 emergency fund? Answer: 38 months or 3 years and 2 months We now know that in five months William and Sandra will be able to start saving $1,300 a month. We also know that the monthly savings required for the purchase of the car will be $845.16. The monthly savings available to put toward their emergency fund will therefore be $454.84 ($1,300 – $845.16). Since they have to earn the income before they can save it, we have to do the calculations for the end of the period. 0 –454.84 15,000 1 [P/Y] \P/Y\ 12 \C/Y\ 12 [QUI T] Short-term return, net of fees: 1%, capitalized (\C/Y\) 12 times a year. Monthly payments (\P/Y\). 32.55 months 32.55 months + 5 months = 37.55 months or 3 years and 1.5 months Question 2 What is the borrowing rate required from the insurer XYX to allow William to pay his life insurance premium monthly? Note: We are trying to figure out the rate that matches William’s real annual borrowing rate, so we need to calculate the effective rate. Answer: 18.59% A life insurance premium is payable at the beginning of the period (BGN). 1,032 –92.88 0 12 [P/Y] \P/Y\ 12 \C/Y\ 1 [QUIT] An effective rate is capitalized (\C/Y\) once a year. Monthly payments (\P/Y\). 18.59%

©IQPF Participant’s Workbook 143 Question 3 What is the borrowing rate required from the insurer Québec vie to allow William to pay his disability insurance premium monthly? Note: We are trying to figure out the rate that matches William’s real annual borrowing rate, so we need to calculate the effective rate. Answer: 18.59% A disability insurance premium is payable at the beginning of the period (BGN). 1,782.56 – 160.43 0 12 [P/Y] \P/Y\ 12 \C/Y\ 1 [QUIT] An effective rate is capitalized (\C/Y\) once a year. Monthly payments (\P/Y\). 18.59%

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©IQPF Participant’s Workbook 144 Activity – Financial Projections for Retirement Question 1 How many years from now will William and Sandra retire? Answer: William: 38 years; Sandra: 37 years William is 27 and will retire at age 65, or 38 years from now (65 – 27). Sandra is 28 and will retire at age 65, or 37 years from now (65 – 28). Question 2 How much will their respective OAS pensions be the year that William retires? Answer: $14,940.98 The OAS is indexed annually to inflation. You therefore have to index for 38 years the amount payable in 2018 based on the inflation assumption. –7,040 0 38 2 $14,940.98

©IQPF Participant’s Workbook 145 Question 3 How much will their respective QPP retirement pensions be the year that William retires? Answer: William: $36,260.92; Sandra: $41,127.89 The assumption concerning the growth rate of MPE is the same as the assumption concerning William and Sandra’s salary increases. This is the rate that must be used to index the amount of the retirement benefits projected to age 65. But Sandra’s benefit will already have been in service for a year when William retires, and QPP benefits in service 8 increase based on inflation. William –11,793 0 38 3 $36,260.92 Sandra –13,507 0 37 3 $40,321.46 –40,321.46 0 1 2 $41,127.89 8 Benefits are in service once the payments have started to be paid.

©IQPF Participant’s Workbook 146 Question 4 How much will William have accrued in his RPP by the age of 65? Answer: $613,187.33 This is an annuity that increases at the end of the period (END) and you have to find the future value (FV) at age 65. William and his employer are each contributing 4% of William’s salary (total of 8%), and we assume his salary will increase at a rate of 3% per year. Furthermore, the contributions are only made when the salary is paid, at the end of the period. The problem is that it is impossible to calculate the accrued value (FV) of a growth annuity in a single operation, as we would with the present value (PV), simply by correcting the discount rate (I/Y) to take the increase in payments (PMT) into account. We actually have to find the corrected rate 9 and then used it to find the present value (PV), which can then be used to find the future value (FV) using the uncorrected rate of return. Unfortunately, that is not all. It is also not possible to directly find the present value (PV) of an annuity that increases at the end of the period (END), only one that increases at the beginning of the period (BGN). Since it would be hard to ask William and his employer to save on an as- yet-unearned salary, we have to find the present value (PV) of the growth annuity at the beginning of the period (BGN) and discount that value (PV) one additional year, using the uncorrected rate of return. BGN –3,884 $1,942 (contribution on provisional budget) × 2 0 0.68 [(1.037 ÷ 1.03) – 1] × 100 38 Number of periods (years) $130,560.58 –130,560.58 $1,942 (contribution on provisional budget) × 2 0 This calculation is not an annuity. 3.7 Long-term rate of return, net of fees. 1 $125,902.20 –154,170.20 $125,902.20 + $28,268 (value on date of report) 0 This calculation is not an annuity. 3.7 Long-term rate of return, net of fees. 38 65 – 27 $613,187.34 9 [((1 + rate of return) ÷ (1 + rate of increase)) – 1] × 100

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©IQPF Participant’s Workbook 147 Question 5 How much annual income should the accrued amount generate in retirement? Answer: $23,920.89 When planning long-term income, such as retirement income, we have to take inflation into account, so the client’s lifestyle can be maintained. For this reason, you must always plan for an increase in the cost of living based on inflation, along with the use of the retirement capital. In short, you have to calculate an annuity that is indexed to inflation. This is an annuity that increases at the beginning of the period (BGN) for which we want to find the annual payment (PMT). To do this, we have to find the rate of return William can be expected to earn on his investments and correct it to take the increase in payments into account (I/Y). We also have to determine how many years (N) the income will have to be paid, that is, how many payments there will be before the capital is depleted (FV = 0). –$613,187.34 Value of RPP at retirement (age 65) 0 Capital completely depleted 1.67 [(1.037 ÷ 1.02) – 1] × 100 33 98 – 65 $23,920.89 Amount of first payment Question 6 Is Sandra’s defined benefit RPP coordinated with the QPP? Answer: No To answer this question, you have to examine the characteristics of the RPP. The salary contribution rate is uniform for the entire salary and the retirement annuity is calculated based on a uniform rate, regardless of MPE. Also, no additional annuity is planned for people who retire before the age of 65. Question 7 In light of the economic assumptions used, the characteristics of Sandra’s RPP and the planned maternity leaves, at what age will Sandra be eligible for her RPP benefits? Answer: Age 62 28 + 34 = 62 Sandra, who is 28, has one year of service. Her RPP states that she will be eligible for pension benefits beginning at age 65 or 60 if she has 35 years of service. Although she is planning to take three years of maternity leave, these years are taken into consideration for pension eligibility. If she retires at that age, however, her pension will be based on 32 years of service.

©IQPF Participant’s Workbook 148 Question 8 In light of the economic assumptions used, the characteristics of Sandra’s RPP and the planned maternity leaves, how much will Sandra’s RPP benefits be at age 66 (her age when William retires) if she continues to work for this employer until she turns 65? Answer: $124,689.93 Her defined benefit RPP is based on “final salary,” since it is calculated as follows: 1.8% × × 5 Since Sandra has only one year of service, it is reasonable to use her annual salary for her average five-year salary and to index it based on the assumption used for her increases in salary. –65,000 0 37 3 $194,039.73 As concerns the years of service, we have to calculate the total years of service (38) and subtract the planned maternity leaves (3 years). The retirement benefits will be based on 35 years of service. 1.8% × 35 × $194,039.73 = $ , . We want the amount of the benefits at age 66 because that is how old Sandra will be when William retires. Since the benefits payable by the plan are indexed annually to inflation, we have to index this amount to inflation for one year. –122,245.03 0 1 2 $124,689.93 Question 9 What will their combined income net of income taxes be for the first year of William’s retirement? Answer: $204,705.27 William Sandra OAS $14,940.98 $14,940.98 QPP $36,260.92 $41,127.89 RPP $23,920.89 $124,689.93 Total: $75,122.79 $180,758.80 Income taxes (20%) $15,024.56 $36,151.76 Net income after taxes $60,098.23 $144,607.04 $204,705.27

©IQPF Participant’s Workbook 149 Question 10 What amount today would offer the same purchasing power as the net income found in the previous question? Answer: $96,454.50 –204,705.27 0 38 2 $96,454.50 We can see that William and Sandra should be able to spend the equivalent of $21,661.58 more in retirement ($96,454.50 – $74,792.92) than they will spend once they have paid off their credit cards. Question 11 If we assume that neither William nor Sandra will save any more for retirement than what they are saving through their respective RPPs, what will their cost of living be at the time of retirement? Answer: $246,754.45 First, if William and Sandra do not save any more than they are currently saving as a proportion of their salaries, that would mean they spend everything else once the emergency fund has been established. 10 Also, since we have made the assumption that their salaries will increase faster than inflation, the same would go for their lifestyle. –80,251 0 38 3 $246,754.45 The income available in retirement is therefore equal to 83% of their pre-retirement cost of living, which is an absolutely acceptable result when the clients are so far from retirement. Of course, a lot of this result depends on Sandra’s continuing to belong to her RPP, which will not necessarily be the case. 10 $74,792.92 + ($454.84 × 12) = $80,251

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©IQPF Participant’s Workbook 150 Case Study 05 – Marc Champoux Activity solutions Activity – Rate Comparison Question 1 You have to choose the option that gives Josée the highest rate of return. The returns on the various options do not all enjoy the same tax treatment, however, so you have to put them all on the same basis. The after-tax rate is the most representative of reality, since the ultimate goal is to use the money earned for personal purposes. a. Since the car is for personal use, the interest on the loan to acquire it is not deductible. The borrowing rate (2.15%) is therefore already after tax. Equivalent after-tax rate: 2.15% b. With the exception of the registered accounts, the interest income is 100% taxable. You have to use Josée’s marginal tax rate to find the rate net of taxes that corresponds to a taxable interest rate of 3.04%. 3.04% × (1 – 0.46) = 1.64% Equivalent after-tax rate: 1.64% c. The interest paid on a loan obtained through the Québec loans and bursaries program is not deductible from income, but it does trigger a personal tax credit at the basic rates. The combined federal-Québec tax credit is 32.53% including the 16.5% abatement for Québec residents. This is the rate to use to find the after-tax equivalent of the 3.25% borrowing rate. 3.25% × (1 – 0.2753) = 2.19% Equivalent after-tax rate: 2.19% Answer: The option that gives Josée the highest return is to refund her student loan.

©IQPF Participant’s Workbook 151 Question 2 You have to choose the option that gives Antoine the highest rate of return. The returns on the various options do not all enjoy the same tax treatment, however, so you have to put them all on the same basis. The after-tax rate is the most representative of reality, since the ultimate goal is to use the money earned for personal purposes. a. Since the return will be tax sheltered (TFSA), it will not be taxable, regardless of the nature of the investment income. The expected rate of return (4.35%) is therefore already after tax. Equivalent after-tax rate: 4.35% b. Interest on a personal debt is not deductible. The rate (5%) is therefore already after tax. Equivalent after-tax rate: 5% c. With the exception of registered accounts, the interest income is 100% taxable. Making a loan to someone directly rather than buying a bond does not change the nature of the interest received in exchange. You have to use Antoine’s marginal tax rate to find the rate net of taxes that corresponds to a taxable interest rate of 6%. 6% × (1 – 0.37) = 3.78% Equivalent after-tax rate: 3.78% Answer: The option that gives Antoine the highest return is to repay his personal debt.

©IQPF Participant’s Workbook 152 Question 3 You have to choose the option that gives Annick the highest rate of return. The returns on the various options do not all enjoy the same tax treatment, however, so you have to put them all on the same basis. The after-tax rate is the most representative of reality, since the ultimate goal is to use the money earned for personal purposes. a. Eligible dividends, capital gains and interest are not all taxed in the same way for the person who receives them. One-third of the return of 4.35% comes from eligible dividends (taxed at 32%), one-third comes from the capital gain (taxable at 23.5%) and one-third comes from interest income (taxable at 47%). 4.35% ÷ 3 = 1.45% Eligible dividends Capital gain Interest Total 1.45% × (1 – 0.32) 1.45% × (1 – 0.235) 1.45% × (1 – 0.47) 2.87% 0.99% 1.11% 0.77% Equivalent after-tax rate: 2.87% b. The interest on a sum borrowed to earn business income is deductible. The 6% rate therefore has to be converted to an after-tax rate using Annick’s marginal tax rate, which is 47%. 6% × (1 – 0.47) = 3.18% Equivalent after-tax rate: 3.18% c. Interest on a loan contracted to contribute to an RRSP is not tax deductible. The borrowing rate (4%) is therefore already after tax. Equivalent after-tax rate: 4% Answer: The option that gives Annick the highest return is to repay her RRSP loan.

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©IQPF Participant’s Workbook 153 Answers – Corporate Taxation in Financial Planning Activity solutions Question 1: Integration principle (2020) Personally earned income $ ABI SBD federal only $ Profit $1,000.00 $1,000.00 Corporate tax (fed). Total income taxes n/a $90 $205,00 Corporate tax (Qc) n/a $116 Dividend to shareholder n/a Common $795.00 Gross-up n/a 15% $119.25 Net and taxable income $1,000.00 $914.25 Basic federal tax (33%) $330.00 $301.70 Federal dividend credit n/a 9.03% ($82.56) Abatement (16.5%) ($54.45) ($36.16) Basic Qc tax (25.75%) $257.50 235.42 Qc dividend credit n/a 77% ($43.61) Total personal income tax $533.05 $374.80 Available income $466.95 $420.20 Difference from personally earned income ($46.75) (4.67%)

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©IQPF Participant’s Workbook 154 Question 2: Dividend refund Non-eligible RDTOH at the end of 20X1 $400 + Refundable portion of Part I tax ($10,000 + $5,000) × 30.67% $4,601 + Part IV tax $0 - Dividend refund (non-eligible dividends 20X1) $400 Non-eligible RDTOH at the end of 20X2 $4,601 Dividend refund is equal to the lesser of: $10,000 × 38.33% $3,833 Non-eligible RDTOH at the end of the year $4,601 PFPI Inc. is eligible for a dividend refund of $3,833 because of the non-eligible dividends ($10,000) paid in 20X2. Question 3: Énergie Vidéo Inc. Qualification of shares as qualifying small business corporation shares under ITA 110.6 (1): 2-year holding test: met 50% of assets over 2 years: met 90% test (SBC, ITA 248(1)) at the time of disposition: not met because 90% not attained (the building is not mainly used for the operation of the corporation) Eligible assets: $ Cash 3,200 Inventory 150,000 Equipment 40,000 Goodwill 150,000 Percentage of eligible assets: $ , $ , = . % In conclusion: Élliott will not be able to use his CGD because the Énergie Vidéo shares are not qualifying small business shares, but he will be able to take a capital gains reserve to distribute the tax burden from the balance of sale price over five years.

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©IQPF Participant’s Workbook 155 Question 4: 3J Inc. Tax repercussions of the first series of transactions. Sale of the land a) Jean sold the land at a price exceeding its FMV. b) This surplus – $45,000 ($225,000 – $180,000) – is a taxable benefit for Jean, as an appropriation of funds. c) Jean’s capital gain will be as follows: $ Sale price 225,000 Less: ACB (110,000) 115,000 Less: Taxable benefit (double taxation) (45,000) Capital gain 70,000 Taxable capital gain 35,000 The cruise a) Taxable benefit of $5,000 per shareholder, for a total of $15,000, since the cruise is given to the corporation’s shareholders and not to its employees. b) For 3J Inc., this expense is not deductible since the benefit is granted to the shareholders. Tax repercussions of the second series of transactions. $300,000 loan to Jeanne for the purchase of a home a) Excluded loan: It cannot be an excluded loan, as it is granted to a shareholder. b) The general rule for the reimbursement of the loan in the following year applies. c) On July 31, 2019, the year after the loan, the balance of the loan is $270,000, that is, $300,000 – $30,000. Therefore: inclusion in 2018 income. d) Deemed interest received 2018: $30,000 × 4% × 5/12 = $500 2019: $30,000 × 4% × 7/12 = $700 e) Reimbursement of the capital 2020: $30,000 deduction Loan of $50,000 to Joseph to buy a car

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©IQPF Participant’s Workbook 156 a) Excluded loan: Granted to Joseph to buy a car used for his job. b) Therefore: Loan capital is not taxable. c) Interest = taxable benefit. 2018 $50,000 × (5/12) × 4% $833 2019 $50,000 × (7/12) × 4% $1,166 ($50,000 – $16,666) × (5/12) × 4% $555 $1,721 2020 $33,334 × (7/12) × 4% $777 ($33,334 – $16,666) × (5/12) × 4% $278 $1,055 d) Since the car is used for employment purposes, the deemed interest may be deductible.

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