Smith family financial plan Harvard Case Solution & Analysis

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Taxation

According to the Canadian standard, any contribution which is made to the Canada Pension Plan (CPP) and Employment Indemnification (EI) will result in the amount being directly deducted from the total income of the person, for the purpose of income tax calculations.A Canadian residents can give a potential benefit of such a yielding to defer tax for the tenor to the maturity of the pension plan.

The maximum amount that can be invested in the pension plan is 18 percent of an annual income earned by an individual in a fiscal year, for tax purposes.For Smith family it is a better option to contribute to the pension plan and optimize the taxes. Currently, the family is paying taxes at an average rate of 28 percent, which is shown in Appendix 5 of the document. If the family is going through an investment in the pension plan that can have an abundance at the cessation of the arrangement and can hold preserve taxes at the current stage, then it will result in turning out to be a better option for the family.

The maximum amount that the family can contribute to the arrangement is 14,400 dollars annually, where the monthly fee is 1,200 dollars. This arrangement can preserve the taxes by over 4,000 dollars. However, in the current situation of the Smith family, they are facing financial difficulties, but after taking some steps; the family will be able to take this tax advantage for their future betterment.

The family is persuaded to invest 250 dollars per month; therefore, the family can get a minimum tax benefit of 840 dollars,which is the product of 3000 dollars and 28 percent. Then the tax preserved can be utilized for the payment into the RESP.It is advisable to go for the maximum that can accompany having its surplus after making some adjustments, but the priority should be the RESP for their children.

Alternatives

Alternative 1:

The Smith family is paying around 21.5 percent compound annual rate of monthly interest on their credit cards due. The monthly interest payments like current credit card outstanding amount, is 98.5 dollars. The family cannot afford these payments as they have a receipt of interest with an annual interest of 4.5 percent.

The family’spriority should be to pay off their credit card dues as soon as possible. The family has an amount of 4,350 dollars in their current account; it is advisable to pay the maximum number of dues of credit cards as soon as possible, because it may increase the surplus of the family to about 90 dollars. The calculations and results of this alternative have been shown in Appendix 2 and Appendix 4 of the document.

Alternative 2:

The family is considering to opt for another credit card loan arrangement to finance their vacation for their holiday, which can put their children’s future education at stake, requiring an interest payment of 895 dollars per month. The amount of payment of interest is very huge, and if the amount is inverted to the RESP then the future value over 9 years can be above 100,000 dollars. The calculations and results of this alternative have been shown in Appendix 3 and Appendix 4 of the document.

Recommendation

It is advisable to the family to not go on a vacation and pay their reimbursement current credit card. The family should go for investment in a RESP and pay off reimbursement by the remaining surplus in order to reduce the loan interest’s expense.This holiday loan will meet short-term needs due to which long-term can get compromised; therefore, it is advisable for family to go for the long-term needs that are best for the current and future scenario of the family’ssupplement ally..............................

 

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