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Homework answers / question archive / FMGT4410 Chapter 10 Lecture Notes? Tax planning: In general, if a taxpayer expects their tax rate to increase in the between now and when the fundsare withdrawn, a TFSA will provide greater after-tax return
FMGT4410 Chapter 10 Lecture Notes? Tax planning: In general, if a taxpayer expects their tax rate to increase in the between now and when the fundsare withdrawn, a TFSA will provide greater after-tax return. If the opposite is true, an RRSP is generally a better choice – becomes a choice when there is limited cash to investComprehensive Example:Mr. Scott Lancaster is 29 years old and graduated from university in May, 2017. He immediately began working as an industrial designer, earning net employment income of $23,000 (including an RPP deduction of $1,000) during the calendar year ending December 31, 2017. Prior to 2017, Scott had no Earned Income and had made no contributions to any type of retirement savings plan or tax-free savings account.Up until May 2017, Scott had been supported by his spouse, Jacquie. However, they were separated on June 1, 2017. On July 1, 2017, Jacquie was ordered to pay spousal support in the amount of $1,500 per month. In addition, she was required to pay damages of $100,000 relating to claims of spousal abuse. Scott deposited this entire amount in his savings account, resulting in 2017 interest income of $1,500.Scott did not contribute to an RRSP during 2017. However, his employer sponsored an RPP to which Scott contributed $1,300 during 2017 and his employer matched this amount.During 2017, Scott received eligible dividends totaling $700 and a $50,000 gift from his parents to celebrate his separation from his wife. His parents also gave him a rental property in early 2017 and this property experienced a net rental loss of $5,000 in 2017.For 2017, Scott’s income places him in the lowest federal income tax bracket. He anticipates that most of his 2018 income will also be taxed at this rate. However, he expects to receive a significant promotion at the end of 2018 and, therefore, he is likely to be in the maximum federal income tax bracket in 2019 and subsequent years.1. Determine Scott’s earned income for 20172. Calculate Scott’s maximum RRSP contribution without penalty in 2018.3. Provide Scott with any advice regarding his RRSP and TFSA contributions and deductions for 2018.
FMGT4410 Chapter 10 Lecture Notes
Solution:
1. 2017 Earned Income
+ Net employment income 23,000
+RPP deduc?on 1,000
+ Spousal support 9,000
- Net rental loss (5,000)
Answer to 1. 28,000
2. Max Contribu?on without Penalty in 2018
A Unused RRSP Deduc?on Room -
+ B Lesser of
18% of PY Earned Income, $28,000*(.18)=5,040 5,040
2018 RRSP Dollar limit, $26,230
less: Prior year pension adjustment [1,300 x 2] (2,600) 2,440
= RRSP Deduc?on Limit 2,440
less: contribu?ons from prior years not deducted -
= max deduc?ble contribu?on 2,440
+ $2,000 non-penalty excess 2,000
= max contribu?on without penalty Answer to 2. 4,440
1,300 *2 = 2,600 – employee and employer matched contributions
2017 money purchase limit
Answer to 3.
RRSPs
o Scott has ample cash right now (damages from his spouse and the gift from his parents)
o He should max his RRSP contribution due to excess free cash
o He is in the lowest marginal tax rate right now, so it is best not to take the deduction in 2018 but to wait until
2019 when he expects to be in a higher tax rate.
TFSAs
o He has ample cash and should also take this opportunity to maximize TFSA contributions.
o Since he has never contributed in the past, he is now eligible to contribute $57,500.
o Since 2009, TFSA contribution room grew
