Download Full Version FP2 CSI Exam

The taxable policy gain is determined by comparing the policy's surrender proceeds with its adjusted cost basis (ACB).

For this policy, the simplified ACB calculation is:

Premiums paid − policy dividends − net cost of pure insurance

Therefore:

$6,000 − $1,500 − $750 = $3,750 ACB

CRA guidance confirms that the ACB of a life insurance policy is increased principally by premiums and reduced by specified amounts including the net cost of pure insurance; policy dividends to which the policyholder becomes entitled also reduce the ACB.

The policy gain on surrender is therefore:

$8,000 cash surrender value − $3,750 ACB = $4,250 taxable policy gain

Apply the 30% marginal tax rate:

$4,250 × 30% = $1,275

Therefore, option C is correct.

The $4,250 amount itself is not the tax payable; it is the amount included in taxable income under the simplified calculation. Applying the client's marginal tax rate determines the resulting tax liability.

FPII reference/topic: Insurance Planning — permanent life insurance; cash surrender; adjusted cost basis; net cost of pure insurance; policy gains.

===============

December minimizes the actual elapsed time during which the spousal RRSP attribution rule can affect subsequent withdrawals.

The rule operates by calendar taxation years, not by measuring exactly 36 months from the contribution date. Generally, if the contributing spouse made a contribution in the year of a withdrawal or in either of the two immediately preceding years, some or all of the withdrawal may be attributed back to the contributor. CRA confirms this current-year-plus-two-preceding-years framework.

Suppose Julien contributes in December of Year 1. The contribution is relevant for withdrawals occurring in Year 1, Year 2, and Year 3. By January of Year 4, the contribution is outside the three-calendar-year attribution period. The actual elapsed period can therefore be only slightly more than two years.

By contrast, a contribution made in January of Year 1 is subject to the same calendar-year framework but remains potentially relevant for almost three full years.

This does not eliminate the attribution rule; it simply reduces its chronological effect. Other contributions made to any spousal RRSP during the relevant period must also be considered.

FPII reference/topic: Retirement Planning — spousal RRSPs; attribution rules; three-year rule; retirement income splitting.

===============

A consolidation loan is the most appropriate initial strategy. Peter and Anna have multiple debts, including maxed-out credit cards and vehicle obligations, but they also have stable employment, indicating an ongoing capacity to service debt. Their central problem is therefore the number and structure of their obligations rather than an established inability to generate repayment income.

Debt consolidation combines several outstanding debts into one loan, generally producing a single scheduled payment and potentially replacing high-interest credit-card balances with lower-cost borrowing. The Financial Consumer Agency of Canada specifically identifies consolidation loans as a method of combining multiple debts and simplifying repayment.

A revolving line of credit may also consolidate debt, but it remains reusable and can create further indebtedness if borrowing behaviour is not controlled. Because the couple does not own a home, home-equity financing is unavailable. Bankruptcy is an insolvency remedy and should not normally be the first recommendation where clients have stable employment and may be capable of restructuring their obligations. “Automatic discharge” relates to the bankruptcy process rather than being a standalone debt-management strategy available before bankruptcy.

FPII reference/topic: Savings Planning and Debt Management — debt restructuring; consolidation loans; consumer credit management; insolvency alternatives.

===============

Paul should normally pay the mortgage last because it carries the lowest interest rate at 3.95%.

When the objective is to minimize total financing costs, additional cash should generally be directed first toward the highest-cost debt, provided minimum payments are maintained on all obligations. This is commonly described as the debt-avalanche approach.

Paul's debts rank by interest rate as follows:

Credit card — 15.00%

Consolidation loan — 8.95%

RRSP line of credit — 6.00%

Mortgage — 3.95%

Each additional dollar used to reduce the credit-card balance prevents interest accruing at 15%, which creates a substantially larger guaranteed financial benefit than using the same dollar to prepay debt costing only 3.95%.

The mortgage has a long 22-year amortization, so it will generate meaningful total interest over time. Nevertheless, when prioritizing simultaneous debts strictly according to borrowing cost, its low rate makes it the final repayment priority among the listed obligations.

An advisor should additionally assess liquidity, penalties, tax consequences where relevant, and contractual repayment requirements. Based on the facts supplied, however, the mortgage is clearly the lowest-cost liability.

FPII reference/topic: Savings Planning and Debt Management — debt prioritization; interest costs; debt repayment strategies.

===============