CASE SIMULATION
It is September 13, 2021, and you, CPA, have just met with Jim and Karen Thurold, new clients who
came to you after reading an article you wrote on financial planning for a local newspaper. The article
stressed the importance of budgeting to be able to retire when wanted with enough money to sustain
the desired standard of living, and the importance of setting other important personal goals, like
education savings. It also mentioned that, in general, rates of return are declining, and most financial
planners are currently estimating 6% as the rate of return, although rates should be reviewed on a regular
basis. The article made Jim and Karen realize they need advice on how to reach their financial goals.
After the meeting, you summarized information about Jim and Karen’s goals (Exhibit I), including
their current financial situation (Exhibit II). You also reviewed their 2020 personal tax returns. Excerpts
from your review notes are included in Exhibit III. You have scheduled a meeting in a few days to
present Jim and Karen with a draft financial plan, and to discuss tax planning opportunities and pitfalls
related to their current situation and financial goals.
Reprinted from the 2008 UFE Report, with permission Chartered Professional Accountants of
Canada, Toronto, Canada. Any changes to the original material are the sole responsibility of the
author and have not been reviewed or endorsed by the Chartered Professional Accountants of
Canada.
EXHIBIT I
SUMMARY OF DISCUSSIONS WITH JIM AND KAREN THUROLD
PERSONAL INFORMATION AND GOALS
Jim Thurold is a 45-year-old manager at a large software firm. He hopes to retire at age 55. Karen is a
44-year-old self-employed home decorator who has worked part-time since the birth of their first child.
She would like to give up her business when Jim retires. Jim and Karen currently earn approximately
$115,000 per year combined, and would like to maintain a retirement income equal to 70% of that
amount. Based on their families’ histories, they expect to live to age 85, and want to be sure they will not
be short of cash in their retirement.
Karen works from a downtown office she shares with two other decorators. The other two have recently
incorporated their businesses, and have been selling her on the tax advantages of incorporating. Karen has
a bookkeeper who prepares the annual income statement she uses to file her tax return.
Jim and Karen have two children, 12-year-old Ian and 18-year-old Samantha. Samantha has just been
accepted into a two-year program at a local college. Jim and Karen are excited, but a little worried about
being able to pay the estimated $6,000-per-year tuition cost. They would like to start saving now for Ian’s
education so they do not find themselves in the same situation again in six years, particularly since Ian
plans on attending a four-year university program at a minimum cost of double Samantha’s yearly tuition.
Jim and Karen have long dreamt of owning a cottage in their retirement. They have watched cottage
prices in the area skyrocket in recent years, and would like to buy before prices are completely beyond
their reach. They estimate they will need to spend $150,000 for a suitable cottage if they buy within the
next two years.
EXHIBIT II
JIM AND KAREN THUROLD
CURRENT FINANCIAL SITUATION
1. Jim and Karen purchased their home in 2003 for $175,000, and they estimate its current value at
$400,000. Their mortgage is currently $80,000, with interest at 7.5%. Mortgage rates are now 5%.
The mortgage is due for renewal in two years. Payments are $850 per month.
2. In 2020, they drew $20,000 on their line of credit to build a swimming pool and finish the basement.
The line of credit bears interest at 8.5%. They make payments of about $500 per month.
3. Credit card debt of $8,000 mounted late last year after the family took a last-minute cruise. They try
to pay off at least $250 per month, including interest, which averages $150 per month.
4. Karen has a registered retirement savings plan (RRSP) loan of $3,500, bearing interest at 9%, from
last year’s contribution. She had received a flyer from the bank advertising the loan and stating that
the first interest payment would not be due until after she filed her tax return. Karen thought she
would pay off the loan quickly, but has not.
5. Jim’s car is a 2015 Honda Accord, worth $12,000. He has paid off his car loan, and now spends
approximately $200 per month on insurance, gas, and maintenance. Karen’s car is a 2018 Toyota
Sienna. She has a car loan of $15,000 at 8%, with payments of $300 per month, and she spends
approximately $250 per month on insurance, gas, and maintenance.
6. Jim’s RRSP is worth $85,000. It has lost a lot of value in the last couple of years because it is heavily
invested in technology and biotech stocks. Karen’s RRSP is worth $30,000 and is invested in
Canadian and US balanced equity funds.
7. Jim received an inheritance several years ago and invested it in guaranteed investment certificates
(GICs), which are now worth $35,000. He views these as a safety net. The GICs earn interest at 4%,
on average.
EXHIBIT II (continued)
JIM AND KAREN THUROLD
CURRENT FINANCIAL SITUATION
8. Jim is a member of his company’s defined benefit pension plan. He builds up his pension entitlement
at 2% per year of service. If Jim retires at age 55, he would receive an annual pension equal to 30% of
his income.
9. Other monthly expenses are:
• $2,000 on food, entertainment, and personal care needs;
• $1,000 on clothing, gifts, and other miscellaneous expenses; and
• $500 on household expenses such as home insurance, utilities, etc.
10. Jim earns $75,000 per year. His take-home pay is $4,000 per month. Karen’s business income net of
related expenses is $40,000 per year, before tax. Last year she paid a total of $10,000 in Canada
Pension Plan contributions and income taxes.
EXHIBIT III
NOTES FROM REVIEW OF JIM AND KAREN’S TAX RETURNS
1. On his 2020 tax return, Jim reported interest income on the GICs of $1,400.
2. Jim also reported a net rental loss:
Rental revenue $ 4,800
Expenses
Mortgage payments 3,400
Line of credit payments 2,000
Home insurance 160
Heat, electricity and water 1,400
Telephone and cable 440
Maintenance 3,000
Capital cost allowance 2,000
Net rental loss $ (7,600)
He deducted one-third of the house’s expenses because, for the first time, he rented out the basement
to Karen’s nephew, Dylan. Jim has given Dylan a break on the rent because he is family and is in
university.
Maintenance costs were high because Jim and Karen installed a heater and a shed, both for the pool.
They also widened the driveway to accommodate Dylan’s car. Jim noted that electricity costs
increased a lot because of the pool heater.
3. Jim’s Notice of Assessment for 2020 indicates that he has $20,000 of unused RRSP contribution
room.
4. Karen’s Notice of Assessment for 2020 indicates that she has $35,000 of unused RRSP contribution
room.
