Question.3269 - Question 3 Sarah Qadhi is going to get her life onto a better track in Rossland, BC, and she will start next Tuesday evening with weekly yoga classes, without fail, every Tuesday. Maybe she can even manage the occasional extra class on a weekend. The program cost is either $40 per class at the time of the class, or a full year membership for unlimited classes costing $1,999. She can earn 2% EAR on safe instruments in her regular investment account. She is in the top tax bracket. If she doesn’t pay her entire credit card balance, the interest rate is 24% p.a., compounded monthly. REQUIRED:(a) For 52 classes, if she always pays off her credit card on time and has already used up all her contribution room in her Tax Free Savings Account, which program should she choose, pay each class or an annual membership? (b) For 52 classes, if she has an overdue balance on her credit card of $5,000 and lots of contribution room in her TFSA, which program should she choose? (c) Now add some common sense to the mix. What other factors should she consider in her decision on which program of payments she chooses?Question 4 Denis Kwon will earn $50,000 this year. He expects that promotions will raise his salary by 10% at year-end for each of the next four years. That means that he expects his salary will rise to $55,000 for the second year, and so on. At the end of the fifth year he expects a big promotion that will raise his salary by 30%. For the 20 years after that he expects only to get raises at the rate of inflation, often called COLA (for cost of living adjustment). His savings program is to save 5% of his salary every year. Ignore income tax in this problem. Assume he earns 4% p.a. on his savings and the rate of inflation is 3% every year. REQUIRED: (a) How much does he expect to have saved at the end of 25 years? Round to dollars. (b) What is the purchasing power of the savings in part (a), expressed in today’s dollars? Question 5 Lori Daniels and Michael Defrancesca are planning for a house purchase and then having two children, during the next few years. They are about to make an offer on a house costing $400,000, for which they have saved $100,000. The mortgage rate is 5% p.a. for a five year term, 25 year amortization. They have $22,000 in their TFSAs, earning 2%. They plan to have their first child in three years, and the second child in five years from now. Lori will stay home from work for one year with each child, and still be able to return to her job. She will receive $2,000 per month net of taxes in maternity benefits for the first four months of each maternity leave.2 Lori takes home $3,000 per month now from her work, after taxes and all other deductions. Mike takes home $4,000 per month. Once the first child is born and while Lori is on leave, his take home pay will rise to $4,200 per month. After the second child is born and while Lori is on leave, his take home pay will rise to $4,400 per month. When Lori is back to work, her take home rises by $400 per month for each child. These increases are due to the child tax credit and tax credits for day care expenses. Right now they are spending $1,500 per month on rent with all utilities included. Once they buy the house, they will spend $300 per month on municipal taxes, $300 per month on utilities and $100 per month on maintenance. Their current living costs are $4,000 per month on everything else – food, clothing, transportation, etc. Once the children are born, they expect these costs to rise by $300 per month for each child. During the next three years they plan to reduce their monthly living costs by $400 per month in order to be able to save more so that Lori can stay home for the two years of maternity leave. When Lori returns to work, day care will cost They will save everything in their TFSAs (assume there is enough contribution room). How much money will they have in their TFSAs at the end of eight years, or will they run out of money before Lori returns to work? Question 6 Oleg Gudkov lives in North Bay, Ontario. He earned net income of $50,000 in 2012, before including investment income. He had non-refundable tax credits of $3,000, excluding dividend tax credits and tax credits on donations. At the start of 2012 he received an inheritance and he used the money as follows: ? $10,000 in a GIC earning 1.5% p.a. ? $20,000 in a portfolio of preferred shares. They paid eligible dividends of $800. He sold them for $23,000 just before the end of the year. ? $10,000 donation to Pollution Probe. He made no other donations in 2012. a) Leaving aside his investment income, how much tax does he pay on his 2012 income, including the donation tax credit? The textbook doesn’t tell you how to calculate the provincial donation tax credit, only the federal one, but the provincial one behaves in the same way. However, if that clue is not enough, you can find it by going to the CRA website and looking at the Ontario provincial tax calculation form in the Ontario tax package for 2012. (8 marks) b) How tax does he pay on his investment income in 2012? (8 marks)

Answer Below: