Case 1 Instructions

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Jan 9, 2024

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CASE 1 PERSONAL FINANCE - FINA200 Winter 2022, Section EC Case 1 (due February 25, 2022, before 5:00 p.m. ET) Covering Chapters 1 - 7 _______________________________________________________________________ Student Name: Ian Davis Student ID: 40160756 _______________________________________________________________________ PLEASE NOTE INSTRUCTIONS BELOW -Write your name and student ID above. -Save the file to upload as: last name plus student number (example: Parla855555) Note: the file name will automatically change to a numbered file once uploaded; this is normal . -This is an individual assignment, to be completed by you alone. -There are 13 pages to this Case including the cover page – please ensure that you have all 13 pages. -Case 1 consists of two sections . Answer: Section I: respond directly on the Case and highlight as well as underline your response to the multiple-choice questions. Section II: respond directly on the Case in the space provided for each Mini- Case question. -You may submit your solution in English or French; acceptable submission formats include Word (.docx or.doc) or PDF. EXCEL is NOT accepted. -Ensure that all responses with calculations are to two decimal places . - Tables can be found at the end of the Case to help respond to some of the questions. Outside research/sources will be required. This Case is 20% of your grade. For marking purposes only: Multiple Choice Mini-Case A Mini-Case B Mini-Case C Mini-Case D Mini-Case E Total /2.5 /4 /4.5 /2 /2 /5 /20 Page 1 of 15

Section I: Five (5) Multiple-Choice Questions (2.5 marks - .5 marks each) Highlight AND underline your response. 1) Lenny is in financial trouble. As a last resort before filing for bankruptcy, he has decided to make an offer to reimburse his creditors. This is called a __________________________________. a) Consumer Proposal b) Consumer Report c) Consumer Rights d) Consumer Protection e) Consumer Pre-Bankruptcy 2) Nina graduated from university in 2021 with a large tuition loan but was excited to have landed a very lucrative job with Microsoft. Despite the great salary, she was terrible with managing her money. She continuously overspent her paycheque. She even bought a Tesla, which she could barely afford. Instead of trying to gain control, she made things worse by continuing to buy. She decided to file for bankruptcy as she fell behind on all her loans, and credit cards. To make matters worse, she lost her job at Microsoft and could no longer make any payments. Nina transferred her Tesla to her sister just before filing for bankruptcy. Which statements are true? I. Nina gets to keep two credit cards but must return the other six credit cards. II. In the event of declaring bankruptcy within seven years of ceasing to be a student, Nina must still pay back her student loan. III. Nina’s creditors will be notified of her filing bankruptcy. IV. The Tesla transfer would be deemed a void transaction as it occurred less than five years when made to a family member. V. Nina gets to keep the Tesla as this would be her only mode of transportation to work, when she gets a new job. a) I, II, V b) II, III, IV, V c) II, III, IV d) I, IV, V e) All responses Page 2 of 15

3) Jessie’s gross annual salary is $91,800. His employer has withheld monthly income taxes and other payroll deductions of $3,800. Jessie has monthly fixed expenses of $1,850, variable expenses of $1,400 and savings of $600. His monthly disposable income is: a) $1,350 b) $3,000 c) $600 d) $1,000 e) $3,850 4) Mike was always bragging about his money. This time, he told you that he just contributed $23,400 to his Registered Retirement Savings Plan (RRSP), the maximum amount that he was permitted based on his contribution limit. He also let you know that he maximizes his RRSP contribution every year, which is irritating as he knows that you have not yet started on your own RRSP contributions. He however does not want to tell you his salary (and rightly so as this is confidential!) but based on the information that he has provided, you can figure it out. You know the maximum RRSP contribution limit for 2021 is $27,830 (Table D), and you also know that the formula is the lower of a) 18% of the previous year’s earned income and b) the maximum contribution limit. You also know that Mike does not have a company pension plan, nor did he receive a salary increase in the last three years as his company has been locked in union negotiations. What is Mike’s salary? a) $118,000 b) $130,000 c) $154,611 d) $100,000 e) None of the responses 5) Three years ago, Vasu purchased 8,750 shares in a Canadian start-up company called Wild Ride Inc. for $8,000. He decided to sell 1,000 shares on February 18, 2021, when they hit $6/share Page 3 of 15

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so he could contribute to his Tax-Free Savings Account (TFSA). He knew he would incur a large capital gain which he would have to report on his 2021 personal income tax return, however he also had a capital loss of $600 on some mutual funds that he sold in December 2021. Knowing that Vasu lives in Quebec and is in the highest marginal tax bracket, how much tax will he pay on the sale of these investments in 2021? See Table A. a) $1,439.37 b) $2,242.86 c) $4,485.71 d) $5,085.71 e) $1,195.67 Section I completed, continue to Section II. Page 4 of 15

Section II: Five (5) Mini-Cases (17.5 marks) Please write your response in the template or space provided (or highlight AND underline , where required). Mini-Case A: (4 marks) Kevin just turned 18 years old on February 18, 2022, and received money from his parents, aunts, and uncles. In total he had $2,000 and wanted to invest it. He has always saved his money and started saving at the age of 15 when he started working at his father’s company, but until now, has only put it in his savings account. Kevin went to the Canada Revenue Agency (CRA) site under My Account after he filed his 2020 personal income tax return to confirm his contribution room for both a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). He however is in a dilemma to know which one to contribute to. He is going to his bank next week to open both accounts and will decide then. His total contribution will be the $2,000 from his birthday and his previous savings of $3,000 when working with his father during summers. He will invest the $5,000 and then withdraw it all on December 15, 2022, to buy a touring bike for his trip to Australia that he will be taking over the holidays. See Table C and D. a) Based on the information above, which would be the recommended account for Kevin to contribute to with regards to either an RRSP or TFSA, and the reason? (.5 marks) ___________________________________________________________________________________ ___________________________________________________________________________________ b) Kevin’s mother thought her son was quite clever in investing his money. She does not understand how an RRSP or TFSA work and asked Kevin to help determine her contribution room for both accounts. Do not forget to consider her carryforward amounts (if any). (1 mark -.5 marks) Kevin’s mother: (currently 40 years old, birthday is May 3rd):  graduated from university in April 2000 but decided to stay home to raise Kevin;  she never had a full or part-time job and is not planning on doing so as she spends endless hours volunteering with many charities in her community; and  to date has never contributed to her RRSP nor to her TFSA. 2022 RRSP Contribution room for Kevin’s mother: (.5 marks) 2022 TFSA Contribution room for Kevin’s mother: (.5 marks) Page 5 of 15

c) When it comes to RRSP and TFSA, Kevin’s father, George has simply transferred the amounts to both plans based on what his tax advisor recommends. George has always contributed the maximum to both his RRSP and TFSA on January 1 st each year, but without quite understanding how either the RRSP or TFSA work. He has therefore asked Kevin to work out a few scenarios for him to help him better understand. (2.5 marks) George: (currently 41 years old, birthday is June 23rd):  graduated in April 2000 and met Kevin’s mother at their graduation ceremony, they married a year later; and  started his own business upon graduation and always paid himself a salary of $300,000 each year for the last 22 years. Scenario 1: George wants to know how his tax advisor calculated his 2021 RRSP contribution. (.25 marks) Calculate George’s 2021 RRSP contribution (.25 marks) Scenario 2: George’s market value in his TFSA as of February 18, 2022, is $151,000 (this includes his 2022 contribution). If George withdraws $30,000 on March 10, 2022, what is the earliest date he can re- contribute to his TFSA? Highlight and underline your response (only 1 correct answer). (.25 marks)  His birthday, June 23, 2022  December 31, 2022  March 11, 2022  March 10, 2023  January 1, 2023  February 1, 2023 Scenario 3: If George over contributes to his TFSA (i.e. more than the contribution room limit), what will be the penalty? (.5 marks) ___________________________________________________________________________________ ___________________________________________________________________________________ Scenario 4: If George over contributes to his RRSP (i.e. more than the contribution room limit) by $2,000, what will be the penalty? (.5 marks) ___________________________________________________________________________________ ___________________________________________________________________________________ Page 6 of 15

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Scenario 5: George is thinking that his TFSA investments are too conservative and wants to invest in XYZ Inc. as their stock is up 40%! If George invests all his TFSA money in XYZ Inc. and it continues to climb to the crazy predictions that his investment advisor says, then George expects his TFSA could have a market value of $400,000! This would pay for the cottage he has been looking at. If George indeed makes $400,000 by November 2022 and immediately withdraws the amount, how much could he then re- contribute to his TFSA in 2022? 2023? (.5 marks-.25 marks each) 2022: $____________ (.25 marks each) 2023: $____________ (.25 marks each) Scenario 6: Consider George’s example in Scenario 5, but this time, instead of his TFSA growing to $400,000, he loses all the money as the company goes bankrupt in November 2022. How much would his contribution room then be for 2022? 2023? (.5 marks-.25 marks each) 2022: $____________ (.25 marks each) 2023: $____________ (.25 marks each) Mini-Case B: (4.5 marks) Ava has asked you to help prepare her 2021 personal income tax returns (combined Federal and Quebec). For 2021, she provided you with the following:  T4 tax slip from Hydro-Québec where she works as an engineer, reporting her 2021 gross annual salary of $105,000;  T5 tax slip showing interest income received in 2021 of $1,500;  On December 1, 2021, she sold 100 shares in Canadian Tire for $180/share (she had purchased 150 shares when they were at $110/share in 2019);  Made a Tax-Free Savings Account (TFSA) contribution of $6,000 on January 1, 2021;  Contributed the maximum to her Registered Retirement Savings Plan (RRSP) plan on May 15, 2021, when she received her company bonus (note that her 2020 earned income was $100,000; she maximizes her RRSP contribution each year and is not part of a company pension plan);  Professional dues from the Order of Quebec Engineers that she can deduct in the amount of $945; and  Has a capital loss of $600 from a previous year that she can deduct against her capital gain. a) It is February 18, 2022, calculate Ava’s 2021 Taxable Income. (1.5 marks) Calculate Ava’s 2021 Taxable Income (1.5 marks -.25 marks each) Page 7 of 15

b) C alculate Ava’s combined Federal and Quebec taxes payable. Use Table A, 2021 tax rates . Ignore non-refundable tax credits. (1.5 marks) C alculate Ava’s combined Federal and Quebec 2021 taxes payable (1.5 marks) c) C alculate Ava’s average tax rate. (.5 marks) C alculate Ava’s 2021 average tax rate (.5 marks) d) What is Ava’s marginal tax rate? (.5 marks) Ava’s 2021 marginal tax rate (.5 marks) e) On December 2021 Ava referred one of her friends to H ydro-Québec as they were searching for a Junior Engineer to fill one of their open positions. Even though the referral was in 2021, Ava only received the $5,000 Referral Bonus in her first pay in 2022, which she must include in her 2022 personal income tax return. Assuming she had received the Referral Bonus in 2021, how much tax would she have had to pay on this bonus? (.5 marks) Calculate Ava’s taxes payable on her bonus using her marginal tax rate (.5 marks) Mini-Case C: (2 marks) Anna and Rob have been dating for the last two years. They met when attending Concordia and moved in together in January 2022. They are quite serious in their relationship. Lynn is Anna’s best friend and sees that Rob is terrible with his money and ignores his bills. Anna tells Lynn that Rob will pay eventually, “he is just very busy”. In the meantime, Anna has made the payments to date, but Lynn knows that Anna is struggling financially and is very concerned about her friend’s situation.  Both Anna and Rob’s names are on the Montreal lease, however Rob has yet to pay the January, and February 2022 rent.  Both names are on the electricity and internet bills. The utility companies have sent notice for payment. Again, Anna paid both her share and Rob’s.  Rob’s best friend, Ralph came over for a visit from Germany and has decided to stay. He has been living with them since January 15th but has not paid rent nor contributed towards it (as he is a guest, his name is not on the lease). Page 8 of 15

a) Provide two potential financial impacts Rob’s non-payments could have on Anna. (1 marks-.5 marks each) 1) Impact: ___________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ 2) Impact: ___________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ b) Anna’s credit score is currently 800. Finish the sentence. (.25 marks) Anna’s current credit score of 800 is __________________. c) Rob knows nothing about credit scores, his score is 300. Provide Rob with three (3) ways that he can improve his credit score. (.75 marks -.25 marks each) 1._________________________________________________________________________________ 2._________________________________________________________________________________ 3._________________________________________________________________________________ Mini-Case D: (2 marks) a) Sarah’s VISA is advertised at 29% interest compounded daily. What is the effective interest rate on her credit card? (round to two decimal places using 365 days per year) (1 mark) Calculation for Sarah (1 mark) b) Yasser has just won the Quebec Lottery with a jackpot of $1,000,000. His winnings will be paid out in 50 equal annual installments with the first payment made immediately! He believes the appropriate annual discount rate is 6%. How much will Yasser receive in payments? Hint: set to beginning. (1 mark) Calculation for Yasser: (1 mark) Mini-Case E: (5 marks) It is February 18, 2022, Asra and Yadi are looking to buy their first home but prices during this pandemic seem especially high. To come up with the down payment, they will need to dip into their Registered Retirement Savings Plan’s (RRSP’s) to take advantage of the Home Buyer’s Plan (HBP). To date, Asra has made a total of $27,000 in contributions to her RRSP while Yadi has made $24,000 in Page 9 of 15 109

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total to his. Their RRSP’s have grown over the years and the market value for Asra’s RRSP is $38,763 while Yadi’s RRSP is valued at $31,222. They are now looking to withdraw from their RRSPs under the HBP, for the which they will use as a total down payment on their dream home. They have turned to you for some help to their questions. a) Based on the information they have provided you, what is the total amount that Asra and Yadi can withdraw from their RRSPs under the HBP for their down payment on their first home? See Table E (.5 mark) Total: _____________________. b) Asra and Yadi must start re-paying into their RRSP beginning in the second year of withdrawal. Calculate the minimum annual repayment amount that Asra and Yadi must re-pay to their respective RRSPs? (1 mark) Asra’s calculation for the minimum annual RRSP repayment amount for the withdrawal under the HBP (.5 mark) Yadi’s calculation for the minimum annual RRSP repayment amount for the withdrawal under the HBP (.5 mark) c) Calculate if the down payment on the home through the Home Buyer’s Plan would qualify for a conventional mortgage (they are looking to purchase a property on the market for $331,000). (.5-.25 marks each) Conventional mortgage calculation (.25 marks) Will they qualify for a conventional mortgage? Underline and highlight response Yes or No (.25 marks) d) Asra and Yadi are going to the CIBC to discuss a potential mortgage. Based on the following information, calculate the Gross Debt Service (GDS) ratio. Asra’s gross annual salary is $125,150, while Yadi’s is $123,750. The property they are looking to purchase would result in monthly heating costs of $360, condo fees of $3,950 per year, while their annual property taxes would be $6,484. Asra’s only debt is a car loan of $835 per month, while Yadi has a student loan of $220 per month. Page 10 of 15

Calculate the GDS ratio using a monthly mortgage payment of $5,572. (1 mark) Calculation of the GDS ratio (1 mark) e) Asra and Yadi forgot they had to pay the “Welcome Tax” (also called Property Transfer Duties) on the purchase of a new property. Using the table below or the link for Montreal properties, calculate their Property Transfer Duties https://montreal.ca/en/articles/how- property-transfer-duties-are-calculated-9279 (1 mark) Calculate the Property Transfer Duties (1 mark) f) As Asra and Yadi could barely afford the down payment for a conventional mortgage and as they forgot about the Property Transfer Duties, they are now trying to re-work their numbers. They are curious to know how much it would cost in Default Mortgage Insurance if they only put 15% as a down payment. Calculate their mortgage default insurance using the table Default Mortgage Insurance rates using 15% as a down payment. (1 mark) Page 11 of 15

Canada Mortgage and Housing Corporation (CMHC) Default Mortgage Insurance rates: Calculation of Mortgage Default Insurance (1 mark) The End Good luck! Page 12 of 15

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TABLE A TABLE B TABLE C Tax-Free Savings Account (TFSA): Annual Limits Years Annual Limit Years Annual Limit Year started 2009 - 2012 $5,000/year 2016 - 2018 $5,500/year 2013 - 2014 $5,500/year 2019 - 2022 $6,000/year 2015 $10,000/year 2023 $6,500/year (estimated) TABLE D Registered Retirement Savings Plan (RRSP): Annual Limits Formula for RRSP contribution limit: 18% of your previous year's earned income less your previous year's pension adjustment to an annual maximum. Year Annual maximum contribution limit 2020 $26,500 2020 $27,230 2021 $27,830 2022 29,210 Page 13 of 15

TABLE E Home Buyer’s Plan (HBP)  Withdraw up to $35,000 per borrower and up to $70,000 per couple.  15 years to pay back the amount withdrawn TABLE F Time Value of Money Formulas Simple Interest Future (FV) of a single dollar amount Present Value of a single dollar amount Future Value of an annuity Present Value of an annuity Interest Rate Conversion Time Value: FV = Maturity value or Future value PV = Principal or Present value PMT = Periodic annuity payments n = Number of compounding periods per year i = Annual interest rate t = Time (in years) EY = Effective yield Simple interest: I = Interest earned P = Principal or Present Value r = annual interest rate t = time (in years) Page 14 of 15

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