Try 12 focused AFP 2 Companion case questions on Tax Planning, with explanations, then continue with Securities Prep.
| Field | Detail |
|---|---|
| Exam route | AFP 2 Companion |
| Topic area | Tax Planning |
| Blueprint weight | 14% |
| Page purpose | Focused case questions before returning to mixed practice |
Use this page to isolate Tax Planning for AFP 2 Companion. Work through the 12 case questions first, then review the explanations and return to mixed practice in Securities Prep.
| Pass | What to do | What to record |
|---|---|---|
| First attempt | Answer without checking the explanation first. | The fact, rule, calculation, or judgment point that controlled your answer. |
| Review | Read the explanation even when you were correct. | Why the best answer is stronger than the closest distractor. |
| Repair | Repeat only missed or uncertain items after a short break. | The pattern behind misses, not the answer letter. |
| Transfer | Return to mixed practice once the topic feels stable. | Whether the same skill holds up when the topic is no longer obvious. |
Blueprint context: 14% of the practice outline. A focused topic score can overstate readiness if you recognize the pattern too quickly, so use it as repair work before timed mixed sets.
AFP Exam 2 tax cases require more than naming the rule. Identify the taxpayer, timing, income character, account type, family or business relationship, and how the tax result changes the planning recommendation.
| Case signal | What to check first | Common AFP 2 trap |
|---|---|---|
| RRSP, RRIF, TFSA, or non-registered choice | Current and future tax rates, contribution room, withdrawals, benefit recovery, and liquidity | Treating the lowest current tax as always best |
| Capital gain or loss | ACB, disposition timing, superficial-loss risk, offset availability, and cash need | Harvesting a loss without checking whether it can be used |
| Business owner or incorporated client | Salary/dividend mix, shareholder agreement, corporate cash, succession, and referrals | Giving tax implementation advice without accountant coordination |
| Family transfer or split-income idea | Ownership, attribution, control, age/dependency, and documentation | Moving assets for tax savings without checking legal/tax constraints |
| Estate or insurance tax issue | Deemed disposition, beneficiary, policy ownership, estate liquidity, and probate/tax interaction | Solving tax while creating control or beneficiary problems |
| If you missed… | Drill next | Reasoning habit to build |
|---|---|---|
| Registered-plan timing | Retirement planning cases | Coordinate tax rate, cash flow, contribution room, and withdrawal sequencing. |
| Investment tax character | Investment planning cases | Convert gross return into after-tax client outcome. |
| Business or family tax issue | Estate and insurance cases | Identify ownership, control, attribution, and referral needs. |
| Tax-driven estate issue | Estate planning cases | Balance tax efficiency with transfer control and liquidity. |
These cases are original Securities Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.
Topic: Tax Planning
Erin McLeod, 53, is an emergency physician earning $385,000 annually. Her spouse, Lucas, 51, is a freelance illustrator earning about $45,000 and expects to remain part-time because he helps care for Erin’s mother. Both have already maximized current TFSA contributions and have no unused RRSP room. Their mortgage balance is $260,000 at 3.9%, renewing in 18 months. They want to retire at 63 and 61 respectively, reduce annual tax drag, and keep enough liquidity for a planned $90,000 renovation and possible caregiver costs.
Last month Erin received an $800,000 inheritance in her sole name. It currently sits in a non-registered HISA/GIC mix earning 4.8%, so the income is fully taxable each year at Erin’s top marginal rate. Their planner recommended implementing a prescribed-rate spousal loan as the core tax strategy: retain $150,000 as a liquidity reserve, keep another $150,000 available for the mortgage-renewal decision, and lend the remaining $500,000 to Lucas to invest in a separately titled non-registered portfolio with a long-term growth mandate. Assume the CRA prescribed rate this quarter is 2%, and if the loan is created this quarter, that 2% rate can remain in effect for the life of the loan. Lucas can afford the annual interest payment from his own chequing account.
They are meeting next week to put the recommendation in place and want to understand the most appropriate implementation steps, coordination issues, and ongoing review points.
Current snapshot
| Item | Owner | Amount |
|---|---|---|
| HISA/GIC inheritance | Erin | $800,000 |
| RRSP | Erin | $340,000 |
| RRSP | Lucas | $118,000 |
| TFSA | Erin | $95,000 |
| TFSA | Lucas | $95,000 |
| Joint chequing | Joint | $28,000 |
| Mortgage | Joint | $(260,000) |
To implement the recommended tax strategy, which asset should be used to fund the planned $500,000 loan?
Best answer: D
What this tests: Tax Planning
Explanation: The loan should be funded from Erin’s non-registered inheritance because that is the taxable asset pool causing the current tax drag. The strategy is designed to shift future taxable investment income from the higher-income spouse to the lower-income spouse without disturbing registered plans.
A prescribed-rate spousal loan works best when it is funded with taxable capital held by the higher-income spouse, especially when that capital is generating fully taxable interest. Here, Erin’s inheritance is sitting in a non-registered HISA/GIC mix at 4.8%, so the annual income is being taxed at Erin’s high marginal rate. Using that pool for the $500,000 loan directly targets the current inefficiency. By contrast, RRSP and TFSA assets already receive tax advantages and should usually remain intact unless there is a separate planning reason to collapse them. The household chequing account is operating cash, not long-term investment capital. The key implementation point is to move the right taxable asset, not simply any available asset.
This is the taxable asset pool creating the current tax drag, so using it best supports the intended income-shifting strategy.
Which step is most critical to preserve the intended income-splitting tax result?
Best answer: D
What this tests: Tax Planning
Explanation: The tax result depends on meeting the prescribed-rate loan rules, not just moving cash between spouses. The loan should be documented at 2%, and Lucas must actually pay the interest by January 30 of the following year and each year after.
Under Canada’s attribution rules, simply transferring money from a higher-income spouse to a lower-income spouse does not normally shift the tax burden on investment income. A prescribed-rate spousal loan can create a valid exception, but the mechanics matter: the loan should be established at the prescribed rate in effect when created, documented clearly, and the annual interest must be paid by January 30 of the following year and each year thereafter. Separate account tracing also supports the tax position. If the couple uses joint ownership, ignores interest, or treats the advance informally, the investment income can be attributed back to Erin. In implementation terms, compliance with the loan rules is what turns the recommendation into a workable tax strategy.
A properly documented prescribed-rate loan with timely annual interest payments is the core requirement to prevent attribution.
Which implementation sequence best integrates the tax strategy with the couple’s broader financial plan?
Best answer: B
What this tests: Tax Planning
Explanation: Implementation should respect liquidity and debt planning before seeking tax savings. Because renovation costs and the mortgage decision are near-term needs, only the surplus $500,000 should enter the spousal-loan strategy, and it should remain in Lucas’s separate account.
Good tax planning must fit the full financial plan, not override it. Here, the couple has already identified two near-term uses for capital: a liquidity reserve and flexibility around the mortgage renewal. That is why the recommendation deliberately limits the spousal loan to $500,000 rather than the full inheritance. The best implementation sequence is therefore to ring-fence the $300,000 needed for short-term planning first, then execute the prescribed-rate loan for the remaining amount into Lucas’s separately titled taxable account. Using a HELOC later would substitute borrowing for planned liquidity, while prepaying the mortgage immediately would abandon the selected tax strategy. Joint ownership would also make the tracing less clean. Tax efficiency should be implemented after, not before, essential cash-flow protection.
This sequence preserves known short-term liquidity needs while implementing the tax strategy with the correct amount and clean tracing.
At the annual review, what should the planner verify most carefully?
Best answer: C
What this tests: Tax Planning
Explanation: A spousal-loan review is about compliance first and performance second. The planner should confirm that interest was paid on time, records still support clean tracing, and the strategy is delivering a worthwhile family after-tax result.
Ongoing review of a prescribed-rate spousal loan is not just an investment checkup. The annual review should confirm that the interest was actually paid by January 30, that the borrowed funds remain traceable in Lucas’s separate taxable account, and that the family’s combined after-tax outcome still justifies the structure. If those mechanics fail, attribution can defeat the strategy even if Lucas’s portfolio performs well. Comparing returns to Erin’s RRSP is not the right benchmark because RRSP assets are already tax-deferred and serve a different purpose. Mortgage administration also matters in the broader plan, but it is not the core review test for this tax strategy. The planner’s job is to verify both rule compliance and real tax value.
Those items confirm both ongoing compliance with the strategy and whether it is producing the intended family-level tax result.
Topic: Tax Planning
Aisha Rahman (53) is a hospital administrator and Colin Mercer (55) is a self-employed consultant. They plan to retire in about seven years and have asked their planner to review how their current assets and debts are taxed before any restructuring is recommended. Their priorities are to reduce annual tax drag in their non-registered holdings and avoid losing any interest deductibility by mistake. Assume all figures are in CAD, all assets are held personally unless stated otherwise, and no property has ever changed use.
Aisha and Colin live in a Toronto home purchased for $620,000 and now worth about $1,480,000. It has never been rented or used for business. They also own a lake property purchased for $340,000 and now worth about $780,000; it is used only by the family and has never generated rental income.
Their registered accounts include Aisha’s RRSP of $410,000 and Colin’s TFSA of $95,000. Their non-registered account holds a $140,000 GIC ladder expected to pay $6,300 of interest this year, $175,000 of Canadian bank shares expected to pay about $7,000 of eligible dividends, and a global equity ETF with an unrealized gain of about $32,000 that they do not plan to sell this year.
They also own a rental condo worth $560,000 with annual rent of $31,200. Property expenses other than interest are expected to be $11,400. The condo mortgage balance is $255,000.
| Liability | Balance | Current use of borrowed money |
|---|---|---|
| Home mortgage | $180,000 | Principal residence |
| HELOC | $90,000 | Used entirely to buy the bank shares in the non-registered account |
| Car loan | $24,000 | Personal vehicle |
| Unsecured line of credit | $28,000 | Daughter’s wedding |
The planner confirms that tracing is clean: the HELOC funds went directly to the bank-share purchase and those shares continue to be held. The couple want to understand which items create current taxable income, which are tax-deferred or exempt, and which debt interest may be deductible.
Which holding’s return is generally fully taxable each year as ordinary income under the current facts?
Best answer: A
What this tests: Tax Planning
Explanation: Interest income from a non-registered GIC is the clearest example of fully taxable annual income in this file. Eligible dividends receive different tax treatment, and unrealized gains or TFSA growth do not create the same current ordinary-income inclusion.
Canadian tax planning starts by classifying the type of return. Interest from a non-registered GIC is included in income each year at the client’s full marginal rate, so it usually creates the heaviest annual tax drag. Eligible dividends are also taxable, but they have their own dividend tax treatment, and unrealized gains are generally not taxed until disposition. Growth inside a TFSA is not reported as taxable income while it remains in the plan. When a client wants to improve non-registered tax efficiency, fully taxable interest is often the first return type to review.
Interest from a non-registered GIC is fully included in income each year, unlike dividends, deferred gains, or TFSA growth.
Which liability’s interest is most likely deductible for tax purposes under the current facts?
Best answer: C
What this tests: Tax Planning
Explanation: Interest deductibility depends on the use of borrowed money, not on the fact that a loan is secured by real estate. Here, the HELOC was cleanly traced to dividend-paying shares held in a non-registered account, so it has the clearest income-earning purpose.
In Canada, interest deductibility depends primarily on the use of borrowed funds, not on which asset secures the loan. If borrowed money is directly traceable to an income-earning purpose, such as shares expected to generate dividends, the interest is generally deductible. Here, the HELOC proceeds were traced directly to non-registered bank shares that continue to be held, so that borrowing has the clearest investment-use character. By contrast, debt used for a home, vehicle, or wedding is personal-consumption borrowing and its interest is normally non-deductible. The key takeaway is that tracing and purpose drive the tax result.
Because the borrowed funds were traced directly to income-producing shares in a non-registered account, this interest is the clearest deductible amount.
Assuming the principal residence exemption is fully available on the home, which asset has accrued growth most clearly exposed to capital gains tax on sale?
Best answer: A
What this tests: Tax Planning
Explanation: A secondary personal-use property such as the lake property commonly carries taxable capital-gains exposure when sold. The question removes the home from contention by assuming the principal residence exemption is fully available there.
An accrued capital gain becomes relevant when a non-registered asset is disposed of. A family cottage or lake property that is not sheltered by the principal residence exemption generally produces a capital gain based on proceeds less adjusted cost base and selling costs. The question states that the exemption is fully available on the home, so the home is not the exposed property in this comparison. RRSP taxation works differently: withdrawals are generally included in income rather than treated as capital gains. TFSA sales and withdrawals are not taxable under normal plan rules. In mixed-property planning, the secondary real estate holding is often the asset with the clearest embedded capital-gains exposure.
The family-only lake property is not sheltered here, so its accrued gain is the clearest taxable capital gain.
Which asset normally requires annual reporting of net income after expenses, even without a sale?
Best answer: D
What this tests: Tax Planning
Explanation: A rental property can create taxable income or loss every year based on rent minus deductible expenses and interest, even if the property is not sold. The other listed assets either defer tax or do not generate annual taxable operating income under the stated facts.
Rental real estate is taxed on an ongoing basis, not only when it is sold. The client must generally report gross rent and deduct eligible expenses, including items such as operating costs and, where allowed, interest, to arrive at net rental income or loss for the year. That annual result affects taxable income even if the property is not sold. By contrast, income inside an RRSP is tax-deferred, TFSA growth is generally tax-free, and a principal residence with no rental or business use does not create annual taxable operating income. Rental-property analysis therefore combines both current-income tax and future capital-gains considerations.
Rental real estate normally requires annual reporting of net rental income or loss after deductible expenses.
Topic: Tax Planning
Farah Chen, 47, is a senior engineering executive in Edmonton. Her salary is $238,000 and she expects a $22,000 December bonus. Her RRSP deduction room, after pension adjustment, is $34,000. Her spouse, Neil, 45, is self-employed as an IT consultant and expects $82,000 of net business income after deductible business expenses.
They have one child, Maya, 15, who has cerebral palsy. Maya has been approved for the disability tax credit (DTC) and has no income. No one outside the household supports or claims her.
This year Farah sold an inherited vacant lot and realized a capital gain of $180,000. For this case, assume 50% of the gain is included in taxable income. The couple will have about $30,000 of surplus cash by year-end after maintaining their emergency fund. They are deciding whether to:
They also paid these family costs this year:
Neil told the planner, “Farah should claim all the tax breaks because she is in the highest bracket.” Farah agrees and assumes the DTC, care-related amounts, and any other family tax relief should all appear on her return.
The planner’s preliminary note says the main choice is not simply investment return versus interest cost. The family’s real decision depends on which deductions and credits are available to which taxpayer, and on how much current-year tax payable Farah will face after the lot sale.
Which fact most increases the tax value of putting the $30,000 into Farah’s RRSP this year?
Best answer: A
What this tests: Tax Planning
Explanation: The RRSP decision is especially tax-sensitive because Farah’s current-year taxable income is unusually high. Her salary, bonus, and the $90,000 taxable capital gain mean an RRSP deduction could offset income at a high marginal rate and materially reduce tax payable.
RRSP deductions matter most when they shelter income that would otherwise be taxed at a high marginal rate. In this case, Farah already has substantial employment income and, because 50% of the $180,000 gain is taxable, another $90,000 is included in income for the year. That makes current-year tax payable a major planning issue and raises the potential value of using available RRSP room now. Neil’s lower income does not change the marginal benefit of a deduction on Farah’s return, and Maya’s disability credit is a separate non-refundable credit rather than a deduction. The key takeaway is that the lot sale materially changes the RRSP analysis.
An RRSP deduction is most valuable when it offsets income taxed at a high marginal rate, and Farah has both high employment income and a $90,000 taxable capital gain this year.
If the $13,200 program qualifies as child care expense, who should normally claim the deduction?
Best answer: C
What this tests: Tax Planning
Explanation: Child care expense is usually claimed by the lower-income spouse, not by whichever spouse has the higher tax rate. Since Neil earns less and the case gives no exception to that rule, the starting point is his return.
In Canada, child care expense deductions are generally claimed by the lower-income spouse because the rule is designed to prevent income splitting through care costs. The fact that Farah faces a higher marginal tax rate does not let the family simply place the deduction on her return. Here, the program allowed both parents to keep working, Neil has the lower income, and no exception facts are provided. That makes Neil the normal claimant if the program qualifies as child care expense. This is a common planning mistake: the best tax result is constrained by who is legally allowed to claim the deduction.
Child care expense is generally claimed by the lower-income spouse, and Neil is the lower-income spouse in the case.
Assuming Maya has no tax payable, what is the most appropriate treatment of her unused disability amount?
Best answer: B
What this tests: Tax Planning
Explanation: The disability amount is a non-refundable credit, so Maya cannot use much or any of it if she has no tax payable. The unused amount can instead be transferred to a supporting parent, allowing the household to realize a tax benefit this year.
The disability tax credit reduces tax payable; it is not a deduction from income. When a disabled dependant child has little or no taxable income, the child often cannot use the full credit personally. In that situation, the unused disability amount may be transferred to a supporting parent, allowing the household to benefit now instead of wasting the annual credit. It is not something that can be converted into business expense relief or simply added to medical expense claims. The key point is to move an unused non-refundable credit to an eligible supporting person who can actually use it.
An unused disability amount for a dependant child can be transferred to an eligible supporting parent who can benefit from the credit.
Before recommending RRSP, HELOC repayment, or taxable investing, what is the planner’s best next tax step?
Best answer: B
What this tests: Tax Planning
Explanation: The family should not choose between RRSP, HELOC repayment, and taxable investing until current-year tax payable is projected properly. The lot sale, possible RRSP deduction, correct claimant for care costs, Maya’s disability amount, and therapy-related credits all affect after-tax cash.
This is an integrated tax-planning file. Farah’s lot sale creates a $90,000 taxable capital gain, which may materially increase current-year tax payable. At the same time, the family may have an RRSP deduction on Farah’s return, a child care deduction on Neil’s return if the program qualifies, an unused disability amount transferable from Maya, and eligible medical expense relief for therapy costs. Because these items affect different taxpayers and operate differently as deductions versus credits, the planner’s best next step is a full year-end projection before allocating the $30,000. Looking only at the HELOC rate or only at Farah’s return would miss the tax factors that actually drive the choice.
A full projection is needed because the capital gain, RRSP deduction, care-related claims, and transferred credits all affect the family’s after-tax choices.
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