Assignment Task: After a long battle with cancer, Fuad Holt died on March 3, 2017. His will specifies that all of the considerable assets in his estate are to be transferred to a testamentary trust.
Because of difficulties with locating some of Mr. Holt's assets, the transfer to a trust has not been implemented prior to December 31, 2017. Given this, the executor of his estate files a T3 tax return for the period ending December 31, 2017. This return designates Mr. Holt's estate as a Graduated Rate Estate (GRE).
Due to administrative delays of various sorts, Mr. Holt's assets remain under the administration of the executor at December 31, 2018. Because of this, the executor files a T3 return for the GRE for the year ending December 31, 2018.
The beneficiaries of the trust are Mr. Holt's wife Mika, a very successful trial lawyer with an annual income in excess of $275,000, and their 22-year-old daughter Deborah, who has struggled for several years to have a career as a folk singer. Deborah has not enjoyed much success and, as a consequence, she has no Taxable Income for 2018.
In his will, Mr. Holt included a provision that allowed income distributions to these beneficiaries during the period that his estate is being administered by an executor. While the provision allows for distributions to either beneficiary, the timing and amounts are at the discretion of the executor.
For the year ending on December 31, 2018, the GRE had the following income receipts:
Interest $40,000
Eligible Dividends Received from Canadian Corporations 30,000
Total Income $70,000
Required:
Q1. With a view to minimizing total Tax Payable for the GRE and the beneficiaries, determine the amounts and type of income that should be distributed to each beneficiary for 2018. Provide explanations to justify your conclusions.
Q2. Using the allocations you determined in Part A, calculate the total federal Tax Payable for the GRE and Deborah Holt for the year ending on December 31, 2018. In addition, indicate any additional taxes that would be paid by Mika Holt for 2018 as the result of the GRE distributions.
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