The question below is from the introduction to federal income taxation of Canada:
Part A:
For each of the following trusts settled by Mrs. A:
---- explain the tax consequences of the transfer of property by Mrs. A to the trust;
----- identify the rate of tax payable by the trust; and
----- explain the tax consequences of the transfer of property from the trust to the beneficiary.
On June 1, 2016, Mrs. A settled a painting on her daughters, B and C, in trust for her grandchildren, The painting has a cost to Mrs. A of $500 and a fair market value of $7000
Mrs. A provides in her will that her shares of ABC Co. are to be held in trust for her grandchildren. These shares have a cost to Mrs. A of $10,000 and a fair market value of $35,000
Mrs. A's will provides that her remaining properties will be inherited by her daughter, B and C. On her death the properties are held in her estate until distributed to daughters
Part B:
Mr. B died on March 15, 2016. Mr. B's will provides that the residue of his estate is to be transferred to a trust for the benefits of his wife, Mrs. B, a resident of Canada. The will provides that the income of the trust is to be paid to Mrs. B. The will also allows the executors to pay out capital for the benefits of Mrs. B. On Mrs. B death, the trust's assets are to be distributed to the Bs' children. Mr. B's assets include shares of XYZ inc., a public company, which were purchased about 25 years ago for $1,000 and have a fair market value at his death of $100,000.
You have agreed to advise the executor as follows:
Explain the tax consequences to Mr. B arising out of the transfer of the ABC Inc. shares to the trust of Mrs. B
Explain the tax consequences to the trust of holding the shares and earning dividend income
Explain the tax consequences if the shares are transferred to Mrs. B
Explain the tax consequences if the shares are held by the trust at the time Mrs. B dies
How would your answer to (A) be different if Mr. B's will provided the trustees with the power to encroach on capital for the benefit of the Bs' children?
Part C:
Mrs. Jones died about six years ago. Under the terms of her will, an investment portfolio was settled on Mr. Shiah and Mrs. Clive, as trustees, for the benefit of her daughter, Hilary Jones. In 2015, the trust will have a substantial income comprised almost exclusively of capital gain. The trust has a non-capital loss carryforward which arose three years ago
Hilary's income from other sources is substantial with the result that any allocation of income from the trust to her will increase her overall tax liability
Is there any strategy that can be adopted by the trustees in order to reduce the taxes payable in respect of a distribution to Hilary?