CSI Updated FP2 Exam Questions and Answers by kareem

The relevant age for determining how long contributions can continue to a spousal RRSP is the age of the spouse who is the annuitant of that RRSP—Spouse B.

CRA confirms that even after a contributor has passed the age at which contributions to the contributor's own RRSP are permitted, the contributor may continue making deductible contributions to a spouse's or common-law partner's RRSP, provided the contributor has RRSP deduction room and the spouse is 71 or younger on December 31 of the contribution year.

Accordingly, Spouse A's reaching age 71 does not by itself terminate the ability to contribute to Spouse B's spousal RRSP. Since Spouse B is currently 65, contributions can continue until December 31 of the calendar year in which Spouse B turns 71, assuming Spouse A continues to have available RRSP deduction room.

The “first 60 days” concept concerns which taxation year certain RRSP contributions may be deducted against; it does not extend an RRSP's statutory contribution eligibility beyond the end of the year in which its annuitant turns 71.

Therefore, option B correctly identifies the deadline.

FPII reference/topic: Retirement Planning — spousal RRSPs; contribution age limits; contributor deduction room; age-71 rules.

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

Where the risk-free rate, portfolio returns, and standard deviations are supplied, the appropriate risk-adjusted comparison is the Sharpe ratio:

Sharpe ratio = (Portfolio return − Risk-free rate) ÷ Standard deviation

For Portfolio W:

(18% − 6%) ÷ 25% = 0.48

For Portfolio X:

(19% − 6%) ÷ 30% = 0.433

For Portfolio Y:

(21% − 6%) ÷ 20% = 0.75

For Portfolio Z:

(23% − 6%) ÷ 22% = 0.773

Portfolio Z therefore produces the highest excess return per unit of total portfolio risk.

Although Portfolio Y has the lowest standard deviation and an attractive return, its Sharpe ratio of 0.75 remains slightly below Portfolio Z's approximately 0.77. Portfolio Z's higher absolute return more than compensates for its slightly greater volatility.

This illustrates why portfolios should not be evaluated solely by absolute return. A portfolio generating a higher return may be inferior if it requires disproportionately greater risk. Risk-adjusted performance measures normalize returns for the risk undertaken, allowing portfolios with different volatility profiles to be compared on a consistent basis.

FPII reference/topic: Investment and Tax Planning — modern portfolio theory; standard deviation; risk-free return; Sharpe ratio; risk-adjusted performance.

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

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.

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

An Individual Pension Plan (IPP) is normally structured as a defined benefit registered pension plan. Unlike an RRSP, where contribution room is determined primarily by a statutory percentage of earned income and applicable pension adjustments, the required funding of an IPP is actuarially determined.

The contribution required to support the promised pension depends materially on the member's age, pensionable earnings history, and the pension benefit formula. Older members generally require larger contributions because fewer years remain to fund the promised retirement benefit. Earnings history is relevant because defined benefits are commonly based on final-average or best-average earnings, while the benefit formula determines the pension entitlement that must ultimately be funded.

CRA describes defined benefit arrangements as plans in which the retirement pension is determined by a prescribed benefit formula, including formulas based on earnings and pensionable service. The associated pension calculations therefore reflect the member's pensionable earnings and the benefit structure.

Business profitability may affect the employer's practical ability to fund the plan, but it is not itself one of the actuarial determinants of the required pension contribution.

FPII reference/topic: Retirement Planning — Individual Pension Plans; defined benefit pensions; actuarial funding; pensionable earnings and benefit formulas.

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