CFP Exam (Canada) cheat sheet

Fiduciary duty requires placing the client's interest ahead of the planner's; it applies whenever a fiduciary relationship exists, not only when a product is sold.

The six-step financial planning process: establish the engagement, gather data and goals, analyze the situation, develop recommendations, implement, and monitor with periodic review.

Material conflicts of interest must be disclosed in writing before or at the time of engagement; disclosure does not by itself cure a conflict that biases advice.

Know-your-client obligations require collecting personal, financial, and risk-tolerance information and updating it at each review or on a material change.

Suitability compares a recommendation to the client's documented objectives, time horizon, liquidity needs, and risk capacity; it is a lower bar than best interest.

Confidentiality survives termination of the engagement; disclosure is permitted only with consent, by legal compulsion, or where required to prevent serious harm.

Continuing education and competence: planners must not accept engagements outside their competence and must refer or upgrade skills when scope exceeds expertise.

Compensation models (fee-only, fee-based, commission) create different conflicts; fee-only removes product commissions but not all bias, such as asset-gathering incentives.

Net worth = total assets at fair market value minus total liabilities; cash flow statement tracks inflows and outflows over a period, not a point in time.

Emergency fund target is typically 3–6 months of essential expenses; longer for single-income households, variable income, or self-employment.

Savings rate = (income − consumption) ÷ gross income; gross savings rate is a stronger predictor of goal attainment than investment return in early years.

Consumer debt with interest above the expected after-tax investment return should generally be retired first; compare after-tax cost of debt to after-tax return.

Debt service ratio = total monthly debt payments ÷ gross monthly income; lenders commonly cap total debt service near 40–44% for mortgage qualification.

Gross debt service ratio includes mortgage principal, interest, taxes, and heating (and half of condo fees); lenders typically require GDS at or below 32–39%.

Liquidity ratio = liquid assets ÷ monthly expenses; a ratio of 3–6 indicates adequate short-term resilience.

Opportunity cost of a purchase equals the forgone after-tax return on the invested amount compounded over the holding period.

Expected portfolio return = weighted average of asset expected returns; portfolio risk is not the weighted average of risks because of correlation.

Diversification reduces unsystematic risk; systematic (market) risk remains and is the risk that commands a risk premium.

Real return ≈ nominal return − inflation (exact: (1+nominal)÷(1+inflation) − 1); use real returns for long-horizon goal projections.

Risk tolerance has two components: risk attitude (willingness) and risk capacity (ability); the lower of the two governs the suitable allocation.

Duration measures bond price sensitivity to a 1% change in yield; a duration of 7 implies roughly a 7% price move for a 1% yield change.

Sharpe ratio = (portfolio return − risk-free rate) ÷ standard deviation; it measures excess return per unit of total risk.

Time-weighted return removes the effect of cash flows and measures manager performance; money-weighted return (IRR) reflects the investor's actual experience.

Rebalancing to target weights enforces sell-high/buy-low discipline; thresholds of 5% absolute or 20% relative drift are common triggers.

Marginal tax rate applies to the next dollar of income; average tax rate = total tax ÷ total income; decisions should be evaluated at the marginal rate.

Taxable income = total income − deductions; non-refundable credits are applied after tax is calculated and reduce tax payable dollar for dollar.

Registered plans defer rather than eliminate tax; the benefit arises when the withdrawal-period marginal rate is lower than the contribution-period rate.

Capital gains are taxed on the inclusion rate applied to the gain; capital losses may offset capital gains only, and unused losses can be carried back three years or forward indefinitely.

Attribution rules: income from property transferred to a spouse or minor child may be taxed back to the transferor; spousal loans at prescribed rates and prescribed-rate loans can avoid attribution.

RRSP contributions are deductible and growth is tax-deferred; TFSA contributions are not deductible and withdrawals are tax-free, so TFSA room is not restored until the following calendar year.

Taxable benefit of an employer-provided automobile uses a standby charge plus an operating benefit; keeping logbooks reduces the operating benefit.

Donating appreciated securities in kind to a registered charity can eliminate the capital gain inclusion while still generating a donation credit.

Replacement ratio estimates retirement spending as a percentage of pre-retirement income; lower-income earners typically need a higher replacement ratio because of progressive taxation and CPP/OAS replacement.

Retirement capital need = present value of the spending shortfall (spending minus guaranteed income) discounted at a real return over the retirement horizon.

CPP can start as early as age 60 with a permanent reduction and as late as 70 with an increase; delaying increases the inflation-indexed lifetime benefit.

OAS is subject to a recovery tax (clawback) based on net income above an annual threshold; the clawback is effectively an additional marginal tax rate.

RRIF minimum withdrawals are prescribed by age and increase each year; a younger spouse's age may be elected to reduce the minimum.

RRSP must be converted to a RRIF or annuity by the end of the year the holder turns 71.

Sequence-of-returns risk is the danger that poor returns early in withdrawal phase permanently impair the portfolio; a cash buffer or flexible spending mitigates it.

Sustainable withdrawal rate is the inflation-adjusted percentage of the initial portfolio that survives the planned horizon with high probability; it depends on horizon, allocation, and fees.

Insurable risk must involve a large number of similar exposure units, accidental loss, determinable and measurable loss, and no catastrophic concentration.

Human life value approach values coverage as the present value of the insured's future earnings net of personal consumption.

Needs approach sets coverage as debts plus income replacement plus education and final expenses minus existing resources and government benefits.

Term insurance provides pure death benefit with no cash value; permanent insurance bundles death benefit with a savings component and higher cost.

Co-insurance clause in property insurance requires the insured to carry a minimum percentage of replacement cost; otherwise claims are reduced proportionally.

Deductibles reduce premiums and moral hazard; the optimal deductible balances premium savings against the insured's ability to absorb the loss.

Disability insurance: own-occupation definitions pay when the insured cannot perform their own occupation; any-occupation definitions are narrower and cheaper.

Critical illness insurance pays a lump sum on diagnosis of a covered condition, independent of actual expenses, and is not a substitute for disability income.

Probate is the court process validating a will; probate fees are levied on estate value, so assets passing outside the will (joint with right of survivorship, named beneficiaries, trusts) avoid probate.

Intestacy: dying without a valid will distributes assets under provincial legislation, often not matching the deceased's wishes and potentially triggering delays.

Spousal trust or spousal rollover defers tax on death by transferring property to a spouse at cost; the deferred gain is realized on the surviving spouse's death.

Deemed disposition at fair market value occurs on death for most capital property, triggering capital gains tax unless a rollover or exemption applies.

Principal residence exemption can shelter the gain on a designated principal residence; only one property per family unit per year can be designated.

Life insurance proceeds paid to a named beneficiary bypass the estate, avoid probate, and are generally received tax-free.

Power of attorney for property manages financial affairs during incapacity; a separate power of attorney for personal care covers health and living decisions.

Estate freeze converts future growth into a new class of shares held by family, fixing the estate's value at the freeze date while transferring future appreciation.