Nguyen, Duy Thang

101102417

Income tax planning

Individual assignment

1) One year of servicing the mortgage VS one-year return on GIC

GIC:

140,000 * 2%= 2,800 $

Profit on GIC: 2,800*(1- 0.34) = 1,848 $

Mortgage rate: 3.25 %

MODE: END

P/Y=12, C/Y=1

N=12*12=144

I/Y=3.25

PV=140,000

PMT= -2,500

CPT: FV= 114,139.09

140,000-114,139.09=25,869.91

Opportunity cost is 2,500*12-25,869.91=4,139.09-1,848= 2,291.09 $

2) RRSP Investment VS Non-Registered Investment to age 65

 Tony

MODE: END P/Y=12, C/I=1

N= (65-23) *12= 276

PV=0

I/Y=5.5

PMT= -1,000
CPT: FV= 542,557 $

Tony Non- Registered investment

I/Y= 5.5* [1-(0.42*0.5)]=4.345 %

MODE: END P/Y=12, C/Y= 1

N=276

I/Y=4.345

PV=0

PMT=-1,000

CPT: FV=467,459.5170$

Opportunity cost:

542,557 $-467,459.5170$=75,097.4871$

 Maria

MODE: END P/Y=12, C/Y=1

N=(65-38)*12=324

I/Y=5.5

PV=0

PMT=-1,000

CPT: FV=725,541.026 $

Non-registered investment

I/Y=5.5*[1-(0.34*0.5)]=4.565%

MODE: END P/Y=12, C/Y=1

N=324

I/Y=4.565

PV=0
PMT=-1,000$

CPT: FV=627,230.99$

Opportunity cost: 725,541.026 $-627,230.99$=98,310.04$

3) RRSP return from deductions VS Payment of same amount during retirement

 Tony

4,000*0.42*23=38,640

8,000*0.34*23=62,560

Total: 101,200 $

Tax on withdrawal: 12,000*0.24*23=66,240 $

Opportunity cost: 101,200$- 66,240$=34,960$

 Maria:

12,000*0.34*27=110,160$

12,000*0.24*27=77,760$

Opportunity cost: 110,160-77,760=32,400$

4) RESP Investment Vs Non-registered Investments

 Sally

RESP

MODE: END P/I=12, C/I=1

N=132

I/Y=5.5

PV=0

PMT=-258.77

CPT: FV= 46,415.79

Non-Registered Investment

MODE: END P/I=12, C/I=1

N=132

I/Y=5.5*(0.42*0.5)=4.345

PV=0

PMT=-258.77/1.2=-215.64

CPT: FV=36,231.07$

Opportunity cost: 46,415.79-36,231.07=10,184.73$

 Nico

RESP:

N=108

I/Y=5.5

PV=0

PMT=309.96

CPT: FV=42,913.1

Non-Registered Investment:

N=108

I/Y=4.345

PV=0

PMT=309.96/1.2=258.30

CPT: FV=33,927.28$

Opportunity cost: 42,913.1-33,927.28=8,985.82$

Analysis

Income split:

Tony with higher income should pay for grocery. Maria pays for investments because she is
in lower tax bracket. For spousal RRSP, Tony pays less tax after the contribution because he
is in higher tax bracket and will pay low tax upon retirement. Besides, Tony and Maria
should contribute to TFSA as long as possible. Tony should pay for Maria’s tax bills by ypur
own funds.

Benefit of RESP:

Tax free on investment growth. Contributions are not taxable. Canada education savings
grant (CESG) money will be deposited directly into your child's RESP 20 percent on the first
2,500 $. With individual plans, that will treat your children equally. You can rollover to
RESP for Sally or Nico who doesn’t want to go to school and then you have to pay back
CESG. Withdrawals are taxed in hands of students so it is little or low tax because the
students usually have low or non-income.

Benefit of RRSP:

Grows tax free until you withdraw it. Contributions are tax deductible. Usually, when you
retire, you will be in low tax bracket so get to pay less tax upon retirement. With beneficiary
rollover, you can get refund of premiums. You should name your spouse or children as a
beneficiary.

Tax free saving Account (TFSA):

You pay no tax on withdrawal and growths. The contributions are taxable. You have to pay 1
percent for overcontributions.

GIC:

You get very low rate of return(2 %) on GIC meanwhile the inflation rate is 1.8%, you almost
get nothing from GIC. Interest income is fully taxed as regular income. With GICs it is also
possible you will have to pay tax on interest that has been earned but not yet received.