On January 1, 2006, Mr. Bucks settled a trust for his daughter Jane, who became age 17 in 2006. The trust was documented by a written agreement. There are three trustees, Mr. Bucks, Mrs. Bucks and a long-time family friend. Among other important provisions, the trust provided that the trustees had complete discretion to distribute any portion of the capital or annual income of the trust to the beneficiary.
Mr. Bucks transferred the following assets into the trust on January 1, 2006:
(a) $250,000 cash; and
(b) 1,500 shares of Successful Retailers Ltd., a corporation that is incorporated in Canada and is a CCPC. The original cost of the shares about 23 years ago when they were purchased by Mr. Bucks was $17 per share. At the date of transfer the fair market value was $20 per share.
The trust purchased a residential rental property with the $250,000 cash early in January 2006. The value of the property was allocated 55% to the land and 45% to the building. The rental income before capital cost allowance but after all other expenses is estimated to be $12,000 per annum.
The amount of dividends paid on the Successful Retailers Ltd. shares for each of 2006 and 2007 is $7,500. The estimated dividend to be paid in 2008 is $7,500. The dividends were received only from income eligible for the small business deduction.
On July I, 2008, the trust sold the rental property for $350,000, allocating 60% to the land and 40% to the building.
In each year, the trust is to "accumulate" 60% of the income earned and pay out the remainder before capital cost allowance to the beneficiary to meet her financial needs.
REQUIRED
(A) Outline the income tax consequences to Mr. Bucks of the transfer of property to the trust in 2006.
(B) Calculate the amount of net income allocable to each of Mr. Bucks, Jane and the trust in 2006, 2007, and 2008, assuming that no elections under the Act have been utilized.
(C) What steps could have been taken when the trust was established to minimize the income allocable to Mr. Bucks?
(D) Calculate the taxes payable by Jane and the trust in 2008. Use the hypothetical individual tax rate table presented in Chapter 10, ¶10,130.