In this Post, we will consider the anxiety caused by the many rates, amounts and calculations that you might find on the exam; look into the exam structure; and explain how you need to approach a collection question differently than a strategy question.
Question concerning rates, amounts and calculations
We received the following inquiry from one of our readers and thought that you would be interested in the issue.
“I have a couple of questions about the 1,000 question test bank. Some of these questions require me to memorize ridiculous information. For example, question 19 in Income Tax Planning requires that I have memorized the 3% of net income ceiling for qualifying medical expenses. Question 25 in the same section requires that I have memorized the Maximum Adoption Expense Amount.”
Your concern is shared by every candidate. Some questions on the Exam will require you to know certain rates, amounts and calculations. The FPSC provides little guidance. So, we need to figure out what would be reasonable in terms of preparation for the Exam.
There are a number of factors that we would consider in assessing whether we needed to memorize a rate or an amount.
Our first consideration would be how "important" the number and calculation are in financial planning.
The RRSP is the most commonly-used registered plan for retirement funding. Therefore, it is very important. It is very likely that you will have a question dealing with RRSP contributions. I would not hesitate to suggest that you should memorize the calculation for new RRSP contribution room including the 18% factor and the RRSP limit for the current year. If you have trouble with the exact RRSP limit for 2017 of $26,010, you should at least know that it is about $26,000.
Relatively, few people would have an opportunity to claim the adoption expenses tax credit and if they did, it would only be for the year in which an adoption was completed. It is not very likely that you will have a question dealing with the adoption expenses tax credit. The calculation of the adoption expenses tax credit is simple.
For 2017, the maximum adoption expense amount is $15,670. If you have trouble with the exact amount, you should at least know that it is around $16,000.
However, we doubt if you would have a question requiring the calculation of the tax credit. If anything, you should be able to answer a question about the financial considerations in adopting, which of course includes any income tax relief provided for the adoption expenses.
Our second consideration would be the complexity of the calculation. There are certain calculations that are mind-numbing and very challenging to recall and to correctly calculate. The calculation for the Working Income Tax Benefit (WITB) comes to mind, as does the capital gains exemption for the shares of a small-business corporation.
We would not be concerned with the WITB calculation, other than to know that it exists, approximately the maximum benefit, and that it is phased in and phased out. People who qualify for the WITB generally do not use financial planners and many of the candidates writing the Exam could not recall and correctly use the calculation anyway.
We would be concerned with the capital gains exemption calculation. Business owners who might use the exemption generally do use financial planners. While some of the candidates writing the Exam could not recall and correctly use the calculation, it has been required on the Exam in the past and is very likely to be on the next Exam.
Our third consideration would be whether or not it is indexed. If it is not indexed, that is it does not change, we would be more inclined to memorize it than if it changed every year.
The 3% of the net income ceiling for qualifying medical expenses has been around for years. For 2017, the net income ceiling of $2,268 is indexed. I would memorize the 3%, but I would at least remember that the net income ceiling is about $2,300.
Our fourth and final consideration would be that the Exam places much more emphasis on the consideration of alternative strategies than the courses do. You will have to show that you can correctly do certain calculations, but there is much more to be concerned about than the medical expenses tax credit.
In the Collection of 1,000 Questions, we included many calculation questions, particularly in the Income Tax Planning section, because we wanted to ensure that you were familiar with all of the features of the Income Tax Act that can affect an individual's income tax liability.
“But if I have to have these obscure figures memorized, I don't see how I have a chance.”
It was not our intention to make you anxious about obscure figures. It was our intention to expose you to anything that the FPSC might throw at you on the Exam. Even if you cannot calculate the WITB, at least you will know what it is. Of course, we included the "Ask John" feature, so you did not waste your time trying to answer questions for which you did not have enough knowledge.
“Are these questions realistic?”
You will find questions on the Exam that are extremely similar to those of the 1,000 Questions. Any of these questions could be on the Exam. However, you need to develop and use your judgement as to what is likely and what you are capable of handling. The candidate who gets the gold medal will know a lot more about this stuff than the candidate who just barely passes.
Nature of the FPE1
The Guide to Examinations for CFP® Certification says:
“FPE1 is a competency-based examination of up to four hours in duration. The examination consists of approximately 95 multiple-choice questions. The examination questions will be presented as a combination of stand-alone multiple-choice questions and two case studies with related multiple-choice questions.”
The June 2017 FPE1 was four hours in duration and there were 93 multiple-choice questions: 73 stand-alone technical questions and two case studies each with 10 questions.
You need to approach a collection question differently than a strategy question. You have answered hundreds of collection questions, not so many strategy questions.
When you are faced with a strategy question, keep in mind that considering the alternatives requires a lot of thought and therefore time. The question will offer at least two very reasonable alternatives. If the question is part of a case study, you will have to search five or six pages of background looking for information.
“The tricky part of the exam was to find the BEST answer. The exam would have two similar answers and we would have to pick the best one.”
Be sure that you do not spend too much time on one of these questions. Know your time limit and flip a coin if you have to. If you can quickly narrow it down to two choices, it is often best to take a guess and spend your remaining time elsewhere.
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John Gobeil, BSc, CFP®
David Gobeil, CPA, CA, CFP®
Certified Financial Planner® and CFP® are certification marks owned outside the U.S. by the Financial Planning Standards Board Ltd. The Financial Planners Standards Council is the marks licensing authority for the CFP marks in Canada, through agreement with FPSB.