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CFIN502- Cheet sheet- Chapters 2,7,8,10.docx

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Ryerson University
FIN 502
Joan Lobo

Chapter 2 Ordinary or deferred annuity- PMTs at end of periods Real rate- uninflated or constant dollars n Arithmetic mean return= ∑ Annuity due- PMTs at the beginning of period Better rate [1+(k/n) ]-1 Perpetuity PMT/I=FV  Period of investment horizon Constant growth annuity (CGA)- stream of payments that grows at Risk—probability that we wont be paid a promised sum a constant rate...if paid bgn multiply (1+i) Income tax—Important rule—use after-tax discount rates for after- Geometric mean return= ∏  Multiperiod horizon as it compounds return tax cash flows. Use before-tax rates for before-tax cash flows Annual percentage rate- conventional method of quoting interest PVCGA= { } FVCGA= { } Inflation- general rise in the prices of all goods and services  rates that ignores the compounding effect completely APR= Pure time premium- the price that we demand for waiting before Problem—adjust the purchasing power of the dollar so that we are we consume.. no risk, inflation, income tax planning for a level of consumption rather than a fixed amount of money Effective annual rate- compound the periodic rate the number Affect discount rates risk, income tax, inflation of times there are periods in the year EAR= Nominal rate- discount rate for inflated or current dollars Fishers equation1+k nom=(1+k r(1+I) Annuity- PMT that is the same in many periods Chapter 7 PERSONAL INCOME TAX Taxable capital gain- capital gains multiplied by ½ Total income - deductions +/- other adjustments = Taxable income Canadian income taxationself assessment  Capital losses- Allowable capital loss— one half of sale creates x Federal tax rate = Federal tax- Federal non-refundable tax credits Average tax rate- total tax payable/ by total income a capital loss- may be deducted from other income max $2000 = Basic Federal tax+ Federal Surtax (not applicable at present) = Marginal tax rate- rate that applies to one more dollar of income Marginal tax rate—rate that applies to the next dollar of income Total Federal tax Surtax- taxes based on tax—temporary and usually apply most compare 2 investment opportunities that are taxed differently  Taxable income x Provincial tax rate = Provincial tax- Provincial heavily on upper tax brackets Essential for long term financial planningcalculate after tax non-refundable tax credits = Basic Provincial tax + Provincial Provincial tax Tax on income—base their taxes on provincial discount rate Surtax = Total Provincial tax taxable income and have their own provincial tax credits Tax on Relevant marginal tax rate is the only that combines provincial and Total Fed. Tax + Total Provincial tax = Total tax payable - Tax Tax% of Federal tax federal taxation—allows for whatever differences apply to the withheld & Other Credits = Tax Owing or Refundable Dividends- distributed to shareholders of some portion of the particular type of income corporations earnings after the corporation has paid tax on Interest or ordinary income with surtaxes  interest and employ themDouble taxation—in order to neutralize its effect- income fully taxable t ct ftp(1+tsp approximately the income tax act includes dividend tax credit Canadian dividend— combined marginal rate with surtaxes—non-  tax credit—13.33% taxable divid 16.67% cash divid elig grossed up (1+0.25)  Federal DTC on non-elig divid—cash divd(25% gross tc(dividend)= [(1+G)t fDTC ]f[(1+G)t -DpC ](1+p ) sp up)=taxable div(fed tax)= fed tax b4 DTC-div tax credit=net fed Capital gain—50% taxable t (gain)=(0.5t )+0.5t (1+t ) c f p sp tax payable on div income Average tax rate= fed + prov tax payable/ taxable income Capital gains and losses—arising on the deposition of taxable  not as useful as MTR property Aft-tax discount rates— non-tax cash flows k =tk (b-t c Chapter 8 INCOME PLANNING  RRSP—used to spread income id we expect a drop income TAX SHELTERS Taxpayers can arrange affairs so that tax INCOME DEFERRALGeneral principle—if you cant use the save and get tax deductions in high income years draw out shelters allow a lower or zero rate of tax—without any deferral or income for consumption purposes—you shouldn’t have to pay tax savings and pay related tax in low years other sacrifice required on it until you can use it INCOME SPLITTING- legal allocation of income, shifting  Dividends VS interest income—Want steady stream of income  Registered pension plan (RPP)- established by an employer to income from higher tax bracket to another member of a lower from investment assets—securities paying dividends or interest are defer income payable to employees to provide retirement income bracketHigher income—pay all expensesLower income— preferred for them-- Employee pays tax on the pension as it is received does all the saving and accumulates investment assets, whose  Specialized tax shelters- investment that allows the investor to Contributions are deductible from taxable income and accumulated income is taxed at a lower marginal rate recover a significant portion of the initial investment very quickly at the before-tax rate of return Taxpayer may contribute to an RRSP for their spouse buy claim through income tax reduction, regardless of the subsequent Registered retirement savings plan (RRSP)- do-it-yourself the tax deduction—Contributing spouse will be in a higher tax earnings on the investment pension planContribution is deducted from income for tax bracket at retirement—ultimate tax payable on the RRSP  Common—capital property, shares of taxable cnd corp purposes in the year it is paid (or 60 days after end of year) into the withdrawals will be lower Registered educational savings plan (RESP)- trusteed savings plan fund and income on it accumulates tax-free Withdraws it for  Spouse may not withdraw contributions until 2 years after sole purpose is to provide tax and government assistance in saving spending purposes, the entire amount, principal and accrued elapsed without triggering attributions of the income back on the for post-secondary education for 1 or more students who are under earnings, is taxable 3 factors-- $ limit, % income earned (18%), contributing spouse—Spousal RRSP has become much less the age of 18 when opened pension adjustments important—significant recent change in taxation of pensions  Income earned subject to a special tax Lifelong learning plan (LLP)- allows you to withdraw up to  Attribution rules respect to spouse—provide where property is  Tax in the hands of parents—accumulated income taxed on $10000 in a year for education expenses for you or your spouse transferred or loaned, directly or indirectly, all income or loss from child  Max contribution $4000/year/child, $42000 lifetime and up to $20000 total property, capital gains or loss on disposition will be attributed back Canada education savings grant (CESG)Human resources and Home buyers plan (HBP)- allows you to withdraw up to $25000 to  As long as investment asses transferred earns more than
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