Financial Planning and Insurance
Financial Planning and Insurance
This domain covers the financial planning process, registered savings vehicles, tax treatment and personal insurance. Questions test whether you can match a client's goal and time horizon to the right product and identify the tax and estate consequences.
Registered plans and tax
- RRSP: deduction limit is 18% of prior-year earned income less the pension adjustment, subject to the annual CRA dollar cap, plus unused room. Withdrawals are taxable; withholding tax applies unless the amount is a qualifying minimum.
- TFSA: contributions are not deductible; growth and withdrawals are tax-free. Withdrawals are added back to room on January 1 of the following year, not immediately.
- RESP: lifetime contributions $50,000; CESG is 20% of the first $2,500 contributed each year, to $500 annually and $7,200 lifetime. CESG is not paid on contributions above $2,500 per year.
- Capital gains are 50% includable; interest and foreign dividends are fully taxable; Canadian dividends receive a gross-up and credit.
- Marginal tax rate applies to the next dollar; average rate is total tax divided by total income.
Insurance and risk management
- Risk treatments: avoid, reduce, retain, transfer. Insurance transfers pure risk.
- Term life covers a set period with no cash value; permanent life includes cash value and can last for life. Disability insurance replaces income; critical illness pays a lump sum on diagnosis.
- Beneficiary designations on registered plans and life insurance generally bypass the estate and probate, but creditors and attribution rules still matter.
- Needs analysis: income replacement, debts, education, final expenses, less existing resources.
Worked example
A client earns $90,000, has a pension adjustment of $6,000 and $2,000 unused RRSP room. Current room = (18% × $90,000) − $6,000 + $2,000 = $16,200 − $6,000 + $2,000 = $12,200. If the client contributes $8,000 and the marginal rate is 38%, the tax refund is $8,000 × 38% = $3,040. The contribution also reduces income at the margin; it is not a dollar-for-dollar tax saving.
Traps
- Missing the 60-day RRSP deadline after year-end.
- Recontributing a TFSA withdrawal in the same year and exceeding the limit.
- Assuming the CESG is paid on the full $50,000 RESP lifetime amount.
- Treating the marginal rate as the average rate.
- Forgetting that a beneficiary designation can bypass the will but may not defeat a creditor claim or attribution rule.