Mar 31, 2015

by Joan Drinah

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**TVM and Tax questions**

TVM and Tax questions

Assignment 1

Instructions:

Each group must submit the assignment to the instructor at the beginning of class on the date the assignment

is due. When completing your assignment, please observe the following rules and guidelines:

1. Textual portions must be typed and double-spaced. This does not include variables, labels and brief notes

of explanation. Use at least one inch margins all around.

2. Double-sided is preferred, if you can do it with your printer.

3. Use 8 ½ X 11 paper only.

4. Do not use report covers.

5. Staple your assignment prior to handing it in.

6. Be sure to write clearly your names, student numbers, section, and due date on the cover page.

7. Spelling and grammar will affect your marks.

8. No assignments will be accepted after the last class.

Problem #1: Tax Planning (40 marks)

You will need to find specific information, including basic personal tax credit amounts, specific tax credit

allowances and 2014 tax brackets from the Canada Revenue Agency website (http://www.cra-arc.gc.ca). The

following information is for Monique Cadieux, a single mom with two children (ages 6 and 9) who lives in

Collingwood, Ontario. Monique is a grade 5 teacher at a local French immersion school earning an annual

salary of $72,000 a year. She would like some help filing her taxes and has documented everything she thinks

should be included below:

• She received child support payments from the children’s father totaling $9600.

• She received spousal support pursuant to a separation agreement totaling $12,000 for the year.

• She contributed $8,000 to her RRSP in 2014; her total RRSP account has $77,590.

• In her investment account, she sold her shares in the Canadian Banks because she was concerned

about their heavy involvement in mortgage lending and oil.

o She sold 500 shares TD $50.76. The costs basis for these shares was $44.50.

o She sold 200 shares RY $75.52. The costs basis for these shares was $65.55.

o She sold 300 shares BNS $60.58. The costs basis for these shares was $50.01.

o She sold her 500 shares in ENB at a loss. The cost basis for the shares $56.90 and she sold

them for $52.55

o Before selling her bank stocks, each paid out dividends as follows: TD paid $1.50/share, RY

paid $2.00/share, BNS paid $.95/share and ENB $.60.

• She has a non-registered savings account with TD. She earned $260 in interest during the year. She

also has a TFSA that earned $120 in interest

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• She made a charitable contribution to United Way for $500.

• Both of her children played in a hockey league for which she paid $600 for the year ($300 per child).

Her daughter took up skate skiing which cost $800 for the year. Her son took cello lessons for which

she paid $400. There were also both enrolled in art camp for the summer which cost $1000 ($500 for

each child). In addition, tennis lessons for both children cost her $400 ($200 per child). Assume all of

these expenses are “eligible” for the purposes of the CATC (http://www.craarc.

gc.ca/gncy/bdgt/2011/qa01-eng.html) and the Children’s Fitness Amount (http://www.craarc.

gc.ca/fitness/)

• She paid $4500 in child care expenses for the year.

• Her son got braces for which she paid $1800 to the orthodontist and daughter needed new eyeglasses

for which she paid $325.

1) Using the information above, answer the following questions:

a) What is her total taxable income (not including investments)? (3 marks)

b) What is the total amount of her federal tax credits? You can use Form T1, Schedule 1 (Appendix A

of this assignment) to calculate her tax credits. Note that you can use the form, but it is not required.

(10 marks)

c) What is the total amount of her federal taxes paid (excluding investments)? (4 marks)

d) What is her marginal federal tax rate? (1 mark)

2) Calculate her provincial taxes. You do not have to calculate her provincial tax credits, but assume they

total $1400 for the year.

a) What are her total provincial taxes paid? (4 marks)

b) What is her marginal provincial tax rate? (1 mark)

3) How much tax does she pay on her investment income and interest in 2014? (15 marks)

4) What is the total amount of taxes she paid for the year? (1 mark)

5) What is her average tax rate? (1 mark)

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Problem 2: Retirement Planning (25 marks)

Muhammad Sheikh has taken a personal finance class so he knows the benefits of saving early for retirement.

He wants to know how much he should be saving each year from his paycheck so that he will be ready for

retirement at in 40 years. He has no savings to speak of and makes $60,000 a year. He expects raises of 2%

each year for the next 7 years at which point he thinks he will be promoted to middle management which

comes with a 25% pay raise. After that, he expects to continue with his 2% raises until he retires (last day of

year 40). His company has a forced 10% retirement savings plan, so he will contribute 10% of his salary each

year. He estimates that he will need 70% of his final year salary to live on in retirement and expects to live for

20 years after he retires. Assume his savings deposits occur each year at the end of the year and his retirement

withdrawals occur each year at the start of the year. This means he makes his last retirement deposit the day

he retires (last day of year 40), and then makes his first withdrawal on the first day of year 41. He then makes

20 withdrawals at the start of each year until he hopes he dies with not a penny to his name. He earns 3%

nominal on his investments before tax, and everything in this problem is calculated in nominal pre-tax dollars.

Assume inflation in his retirement years will be 1.5%

a) How much does Muhammad need to have saved by his retirement date at Age 68? (8 marks)

b) How much will Muhammad have saved by the time he is 68? (8 marks)

c) Will Muhammad achieve his goal? If not, provide Muhammad with three alternatives to help him

achieve his goal. The alternatives must be both reasonable and specific. (9 marks)

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Question 3: Car Financing (25 marks)

Use the following information to find the best deal on a new car. You are interested in buying a Honda Civic

and have looked around for the best financing deals. For each of the scenarios below, calculate the total

finance charges and total cost of ownership. Assume you have an investment account earning an 8% EAR,

where you can invest any money that is not going to car payments. Note that for each option, the total

amount financed is the price of the car plus the destination charge. You must also include HST (13% in all

calculations where HST is applicable – and it’s pretty much applicable on all charges).

1. A financed price of $18,750, plus $1,495 destination charge. The dealer will offer financing at .99%

EAR, compounded monthly, for 36 months. At the time of the loan you also owe $147.85 in fees,

which will not be financed but due at the time you take the car off the lot. Payments are due at the

start of the month.

2. A cash purchase price of $17,795, plus $1495 destination charge. Assume you do not have the cash

set aside to pay for this, so will need to get financing from a bank at a rate of 6.5% EAR,

compounded monthly and will finance the car over 3 years (36 months). At the time of the loan you

also owe $147.85 in fees. Payments are due at the start of the month.

3. You can choose to lease the car with the same purchase price as the financed option ($18,750). Fees

associated with the lease include the same destination change ($1,495), a lien registration fee ($27.85),

and license/transfer fee of $120. The monthly payment will be $321.56 for 36 months and the

residual value is $11,085.20.

Find the total cost of each option (show your analysis), choose one of the options and justify your

answer.

Protected B when completed

T1-2014 Federal Tax Schedule 1

Complete this schedule, and attach a copy to your return.

For more information, see the related line in the guide.

Step 1 – Federal non-refundable tax credits

Basic personal amount claim $11,138 300 1

Age amount (if you were born in 1949 or earlier) (use the federal worksheet) (maximum $6,916) 301+ 2

Spouse or common-law partner amount (attach Schedule 5) 303+ 3

Amount for an eligible dependant (attach Schedule 5) 305+ 4

Amount for children born in 1997 or later

366

Number of children for whom you are not claiming

the family caregiver amount × $ = 5

352

Number of children for whom you are claiming

the family caregiver amount × $ = + 6

367 7 Add lines 5 and 6. = +

Amount for infirm dependants age 18 or older (attach Schedule 5) 306+ 8

CPP or QPP contributions:

308 •9

through employment from box 16 and box 17 of all T4 slips

(attach Schedule 8 or Form RC381, whichever applies) +

on self-employment and other earnings (attach Schedule 8 or Form RC381, whichever applies) 310+ •10

Employment insurance premiums:

through employment from box 18 and box 55 of all T4 slips (maximum $913.68) 312+ •11

on self-employment and other eligible earnings (attach Schedule 13) 317+ •12

Volunteer firefighters’ amount 362+ 13

Search and rescue volunteers’ amount 395+ 14

363 15

Canada employment amount

(If you reported employment income on line 101 or line 104, see line 363 in the guide.) (maximum $1,127) +

Public transit amount 364+ 16

Children’s fitness amount 365+ 17

Children’s arts amount 370+ 18

Home buyers’ amount 369+ 19

Adoption expenses 313+ 20

Pension income amount (use the federal worksheet) (maximum $2,000) 314+ 21

Caregiver amount (attach Schedule 5) 315+ 22

Disability amount (for self) (claim $7,766 or, if you were under 18 years of age, use the federal worksheet) 316+ 23

Disability amount transferred from a dependant (use the federal worksheet) 318+ 24

Interest paid on your student loans 319+ 25

Your tuition, education, and textbook amounts (attach Schedule 11) 323+ 26

Tuition, education, and textbook amounts transferred from a child 324+ 27

Amounts transferred from your spouse or common-law partner (attach Schedule 2) 326+ 28

330 29

Medical expenses for self, spouse or common-law partner, and your

dependent children born in 1997 or later

Enter $2,171 or 3% of line 236 of your return, whichever is less. – 30

Line 29 minus line 30 (if negative, enter “0″) = 31

331 32

Allowable amount of medical expenses for other dependants

(do the calculation at line 331 in the guide) +

332 33 Add lines 31 and 32. = +

Add lines 1 to 4, 7 to 28, and line 33. 335= 34

Federal non-refundable tax credit rate × 35

Multiply line 34 by line 35. 338= 36

Donations and gifts (attach Schedule 9) 349+ 37

Total federal non-refundable tax credits 350 38

Add lines 36 and 37.

Enter this amount on line 50 on the next page. =

Go to Step 2 on the next page.

5000-S1

2,255

4,313

15%

Protected B when completed

Step 2 – Federal tax on taxable income

Enter your taxable income from line 260 of your return. 39

Complete the appropriate column

depending on the amount on line 39.

Line 39 is

$43,953 or less

Line 39 is more

than $43,953 but

not more than

$87,907

Line 39 is more

than $87,907 but

not more than

$136,270

Line 39 is more

than $136,270

Enter the amount from line 39. 40

– – – – 41

Line 40 minus line 41 (cannot be negative) = = = = 42

× × × × 43

Multiply line 42 by line 43. = = = = 44

+ + + + 45

Add lines 44 and 45. = = = = 46

Go to Step 3. Go to Step 3. Go to Step 3. Go to Step 3.

Step 3 – Net federal tax

Enter the amount from line 46. 47

Federal tax on split income (from line 5 of Form T1206) 424+ •48

404 49 Add lines 47 and 48. =

350 50

Enter your total federal non-refundable tax credits

from line 38 on the previous page.

Family tax cut (attach Schedule 1-A) 423+ •50A

Federal dividend tax credit 425+ •51

Overseas employment tax credit (attach Form T626) 426+ 52

Minimum tax carryover (attach Form T691) 427+ •53

54 Add lines 50 to 53. = –

Line 49 minus line 54 (if negative, enter “0″) Basic federal tax 429= 55

Federal foreign tax credit (attach Form T2209) 405– 56

Line 55 minus line 56 (if negative, enter “0″) Federal tax 406= 57

409 58

Total federal political contributions

(attach receipts)

410 •59

Federal political contribution tax credit

(use the federal worksheet) (maximum $650)

Investment tax credit (attach Form T2038(IND)) 412+ •60

Labour-sponsored funds tax credit

Net cost 413 Allowable credit 414+ •61

416 62 Add lines 59, 60, and 61. = –

417 63

Line 57 minus line 62 (if negative, enter “0″)

If you have an amount on line 48 above, see Form T1206. =

415 •64

Working income tax benefit advance payments received

(box 10 of the RC210 slip) +

Special taxes (see line 418 in the guide) 418+ 65

Net federal tax 420 66

Add lines 63, 64, and 65.

Enter this amount on line 420 of your return. =

5000-S1 See the privacy notice on your return.

0.00 43,953.00 87,907.00 136,270.00

15% 22% 26% 29%

0.00 6,593.00 16,263.00 28,837.00

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Comments or questions are welcome.