Integrated Case Study - MANDATORY ASSIGNMENT PDF

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MANDATORY ASSIGNMENT...

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Comprehensive Financial Planning Case Study

BFIN 386-B Prepared for: John & Lisa Patterson

Table of Contents Problems and Issues..................................................................................................................................1 Potential Solutions.....................................................................................................................................2 Analysis of Potential Solutions.................................................................................................................3 Analysis of Solution 1............................................................................................................................4 Analysis of Solution 2............................................................................................................................4 Analysis of Solution 3............................................................................................................................5 Analysis of Solution 4............................................................................................................................6 Analysis of Solution 5............................................................................................................................7 Analysis of Solution 6............................................................................................................................8 Analysis of Solution 7............................................................................................................................8 Analysis of Solution 8..........................................................................................................................10 Analysis of Solution 9..........................................................................................................................11 Recommendations...................................................................................................................................11 Implementation of Recommendations...................................................................................................12 Advisor Follow Up...................................................................................................................................13 Supporting Case Exhibits.......................................................................................................................14 Exhibit 1................................................................................................................................................14 Exhibit 2................................................................................................................................................15 Exhibit 3................................................................................................................................................16 Exhibit 4................................................................................................................................................16 Exhibit 5................................................................................................................................................17 Exhibit 6................................................................................................................................................18 Exhibit 7................................................................................................................................................19 Exhibit 8................................................................................................................................................20 Exhibit 9................................................................................................................................................22 Group PowerPoint Presentation………………………………………………………………………...21 Reference…………………………………………………………………………………………………………….……………………………23

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Problems and Issues 

The Patterson’s are not sure if they can retire in their mid-60’s, they begun to have doubts if they will be comfortable when their retirement is near. John and Lisa have been working hard to accomplish a comfortable retirement, but because of the increasing bills they need to pay it is becoming impossible for them to achieve their goal.

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The couple is concerned as to how they will pay Sarah’s university tuition. They have no RESP, and Lisa’s mother put only $15,000 aside for Sarah while her parents haven’t saved any money. They want to be able to pay for a 4-year bachelor’s degree program (tuition, books & expenses) for Sarah. Saving up for their daughter’s education may also affect their ability to pay off their mortgages and fund their retirement.

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The Patterson’s mortgage is due for renewal in 6 months, and they are wondering which term would be best for them. They are also concerned about the potential impact of rising mortgage rates, because the wrong rate can affect their ability to achieve their retirement goals and paying off their mortgage before they retire.

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Regarding the couple’s sale on their condo in California, they are concerned about the exchange rate and they don’t want to be subject to U.S. domestic tax law. They have no plan to be a resident of the United States.

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The couple is worried about their investment returns. They noticed the returns are only a little over half of what they historically have been (about 11.41% annually). They would like advice on what to do with the investment, as the couple could lose more money from the declining returns.

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John is looking into a couple of dividends paying stocks, but they look expensive compared to the dividends that they are paying. He wants to know if he should go with the Canadian equity mutual fund or buy the dividend paying stocks to get the most return. John needs advice on if these stocks are suitable for his family’s needs and circumstances.

Implicit problems 

John and Lisa currently both have TSFA accounts with $5,500 each, and they are seeking advice on how to invest inside these TFSA’s. The TSFA accounts could increase both of their incomes during retirement, but it could mean they won’t be able to meet their other financial objectives.

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John’s most recent NOA states unused RRSP room of $98,600. As well as Lisa’s most recent NOA states unused RRSP room of $60,400.

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They don’t have an enough amount in their emergency savings. In case of unpredictable events such as the couple losing their jobs or a medical catastrophe, their emergency savings will not be enough.

Potential Solutions 

The couple should start managing their expenses by budgeting their money. It will be helpful if they know exactly where their money will go and if it will bring them income. Another solution is to cut down on some of their monthly expenses.

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They should put the $15,000 from the testamentary trust into the RESP for Sarah and take advantage of the CESG amount. The RESP funds will allow their daughter to go to school and not have to worry about taking out a loan, or any future debts she may have relating to school. Another solution is using the proceeds of disposition of the Brandes Canadian Equity investment to fund for Sarah’s education.

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Advise the couple on the best mortgage rate, which is a long-term rate. A longer term will provide the couple protection against the impact of rising mortgage rates in the upcoming years. The couple could also go for a shorter term with a lower mortgage rate, which will decrease their monthly payments and provide them with extra cash flow.

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Explain the tax implication when a Canadian sells their US real estate (income tax, withholding tax, etc.)

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Recommend a new asset allocation. The Patterson’s will need to sell and buy certain investments.

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Compare the stocks to the equity mutual fund. If the Patterson’s purchase the dividend paying stocks, it could provide them additional cash flow during their retirement. However, there is a risk that it could negatively affect their other financial goals.

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Advising customer invest money into their TFSA, explain the benefit of tax-free savings account. Show how TFSA can make their savings grow tax-free throughout their lifetime.

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Recommend that the client invest money into their RRSP to help them save money faster to achieve their goal to have a comfortable retirement.

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Recommend to the Patterson’s that they should have more money in their emergency fund to cover at least 6 months of major expenses.

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Analysis of Potential Solutions Analysis of Solution 1 Refer to Supporting Exhibit 1 Solution 1 The Patterson’s monthly vacation expenses are $1000, instead of spending that great amount of money on vacation every month they can cut it down to $500. That way they can still go on trips every year, but it wouldn’t be as expensive, and they will eventually be able to pay off their bills that they are struggling with and still have money to go on vacation with. The Patterson’s net worth statement has many expenses that can be decreased and even subtracted off to allow Lisa and John to pay off their bills and not worry about not being able to fully pay their bills. John and Lisa can begin to use their chequing account less for items they want rather then items they need. They can use the chequing account to pay off all their bills so they can feel more comfortable when they’re at an age where retirement is around the corner, and don’t have to worry about delaying retirement because bills aren’t being paid. Since they have an account for emergency savings, they should use some of that money for paying off major bills. They should only use some, not all of their emergency savings so that way they can feel comfortable knowing that they still have a couple grand in their emergency savings in case something unexpected occurs. John and Lisa have a loan for their BMW for 4.9% interest up to $10,700, If the Patterson’s can sell their car that’s a debt to them and get something more affordable, and even take the transit every now and then to save money so they don’t have to worry about a lot of chunks of their money going into just their BMW. Pros: It will be beneficial for the couple with them cutting unnecessary expenses such as the $1000 a month for vacation and using the chequing account for paying some of that money towards the bills, because they will soon feel very relaxed and comfortable when retirement approaches. By deducting expenses that may not be a need rather than a want, it will allow the couple to have a relaxed mind. Cons: The Patterson’s removing or decreasing some of their expenses will be very hard on them and giving up things they fancy will be difficult. It will be a challenge for both Lisa and John and even their daughter because they like spending their money on things they want just like any other person would.

Analysis of Solution 2 University tuition for a science course could cost up to $6,749.64 CAD per term including 5 courses, textbooks and unlimited 7-day meal plan. It would total up to $13,499.28 CAD for both fall and winter 4

terms. There’s a possibility that when Sarah goes to university the tuition will go up in the next 2-3 years. The estimated cost for Sarah’s education is $53,997.12 ($13,499.28 x 4 years) or higher when the time comes. Sarah is currently 14 years old. Sarah could use the $15,000 the testamentary trust to be added on her RESP. The testamentary trust could increase the value into $15,337.50 (15,000 by 2.25% in 1 year). Then Sarah will need an additional $38,659.62. If the couple contributes $5,000 into the RESP each year, they can receive an additional $1,000 Canadian Education Savings Grant. They are also eligible for a child tax benefit of $456.75 which can be contributed into the RESP. By investing $15,337.50 into a RESP and making annual contributions of $6,456.75 for 4 years, Sarah will have $44,544.27. However, $9,452.85 is needed to pay the full 4-year $53,997.12 tuition. The solution to this deficit is to invest the TFSA amounts in a fixed income fund that earns a 3.90% rate of return. In 4 years, the accumulated funds from the TSFA accounts can be used to cover the deficit in Sarah’s RESP. The downside of this solution is that the Patterson’s won’t be able to fully utilize the funds in their TFSA accounts for retirement until Sarah’s education is fully provided. Refer to Supporting Exhibit 2 for calculations Solution 2 The Patterson’s can sell the Brandes Canadian Equity Fund and use the proceeds of disposition (after tax) to cover the deficit rather than using funds from their TFSA. The $19,092.86 amount of the Brandes Canadian Equity Fund could be invested into the RESP. The benefit is that the RESP will grow to $66,242.84. Since this is more than the required amount, the Patterson’s can use the extra money for other things. That way the TSFA accounts can be focused on the couple’s retirement goal rather than using it for Sarah’s education. The con is that the Patterson’s will have a tax liability from selling the units in the equity fund. Refer to Supporting Exhibit 2 for calculations

Analysis of Solution 3 Refer to Supporting Exhibit 3 for calculations The couple’s primary goal is to pay off the mortgage on their home before they retire. If the Patterson’s opt for the 5-year term, they would have monthly payments of $2,594.70. That is $159.68 less than the 10-year term monthly payments, which saves them some money in monthly expenses. The 5-year fixed term rate is 3.79% which is a great rate to take advantage of. It’s much lower than the Bank of Canada’s conventional 5-year mortgage rate which is currently at 5.34%. Pros: The 5-year term has a lower interest rate. By having a lower monthly payment, it will provide the family with additional income to fund for their monthly expenses and their financial goals, such as retirement and funding for Sarah’s education.

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Cons: By the time the 5-year term ends, and the couple is looking for another term, the mortgage rates could significantly increase, and their monthly payments will be higher. Consequently, it will impact their ability to cover their monthly expenses. Refer to Supporting Exhibit 3 for calculations If they went with the 10-year fixed term, the mortgage rate of 4.49% is locked in for the 10 years and the impact of rising mortgage rates will have no effect. Based off exhibit 4, the graph is showing that the mortgage rates will be increasing in the next few years. The Patterson’s have stated they are worried about the impact of rising mortgage rates. The 4.49% is only 0.80% higher than the 5-year term. The monthly payments will be higher, $2,754.38. Pros: Protection against rising mortgage rates in the upcoming years. Cons: Monthly payments will be a little bit higher for the couple, and it can affect their ability to pay for their expenses.

Analysis of Solution 4 The Patterson’s owned a small condo in California for the last 8 years. They sold the property for $300,000 USD a couple weeks ago which they purchased it for $231,750 USD in 2011. The real estate fee is a flat rate of 4% of the disposition. On the other hand, they are concerned about any tax implications on the sale and the Patterson’s don’t want to be considered as a US citizen and be subjected to US domestic tax law. Solution A: Withholding tax When the Patterson’s sell their US property, there are some tax implications that will apply. First, US withholding tax, 15% withholding tax of gross sale proceeds will be subjected at the time of transfer. In this case, the Patterson’s will need to pay $45,000 USD for US withholding tax. But, the withholding tax will be waived if the purchaser intends to use the property as a residence that the purchaser or a member of the family plans to reside at the property for at least 50% of the number of days the property is used by any person during the first two 12-month periods following the date of transfer. The exception only applies when the purchaser is an individual. Pros: The withholding tax is waived when the purchase is an individual and the buyer or a member of the family is planning to use it as a residence. Cons: Customer will need to take the risk, if the purchaser is not an individual, they will need to pay the 15% withholding tax. Solution B: U.S non-resident income tax return / Canadian income tax return Secondly, since our client only lives in US for 3-4 weeks which is considered as US non-resident, they will need to report an US non-resident income tax return and Canadian income tax return. Customer will need to file an US non-resident tax return to report the sale of the property. For US tax purposes, they have owned the property for 8 years which means a capital gain is subject to a preferential long-term US capital gain tax rate, the maximum tax rate will be 20%. (Net sale of proceeds = USD$300,000 * 4% =$12,000 [(USD$288,000-USD$231,750) *20%] =USD$11,250). For Canadian tax purposes, 50% of 6

capital gain is taxable, the taxable capital gain will subject to the customer’s marginal tax rate. (The exchange rate in 2011 is 1.03, and the current exchange rate is 0.76. ([(CAD$378947.37-CAD$225,000)/2 = CAD$76973.69] The Patterson’s don’t need to pay tax on the sale if they designated the property as their principal residence due to the principal residence exemption. If the couple wants to save the principal residence exemption in the future, they can claim the income tax that paid to IRS as a foreign tax credit. Foreign tax credit is a deduction from the taxpayer’s Canadian tax otherwise payable that may be claimed for the foreign income or profit tax paid by the taxpayer for the year. Foreign tax credit pretend taxpayer from being double taxed. Pros: Customer can claim foreign tax credit as a deduction from their Canadian tax, foreign tax credit avoid double taxation. Cons: Customer will need to file a U.S non-resident tax return for the sale of property, and if they want to get the tax they paid on the sale of property, it will take a long time to receive the payment from IRS.

Analysis of Solution 5 Solution A: Withdraw all the funds Customer thinks the rate of return is declining every year and they don’t want to lose money anymore. In this case, if customer wants to stop themselves from losing money on their funds, they can withdraw all the funds right away. If we are selling all the stock fund today, the current dollar balance of BIP121 will be $10822.035, CIB 520 will be $28809, they will need to pay tax on taxable capital gain: $654.50 for index fund and $161.02 for equity fund. Pros: Customer will have more flexibility in choosing other investment product they want. Cons: When customer is selling all the funds from their investment account, they will need to pay tax on taxable capital gain. If the stock price goes up in the future, customer will not gain any profit from it since they have already withdrawn all the funds from their investment account. Solution B: Asset allocation / Investment returns Asset allocation is a strategy that balance risk and rewards by adjusting the percentage of each fund in an investment portfolio. Exhibit 5 is your portfolio allocation on 2009. Portfolio Asset Allocation: 72.368% Index fund; 27.632% Equity fund. Annual compounded rate of return (Exhibit 5). Our total balance held in 2019 is $39631.05. Therefore, the new portfolio asset allocation is 72.693% index fund and 27.307% equity fund. We will need to sell $128.813 index fund and buy $128.813 equity fund to allocate both funds if the Patterson’s is not planning to add more money to the funds. Pros: Asset allocation helps customer identifies their risk tolerance and reduce their investment risk.

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Cons: Customer c...