CPA PEP Prep Q&A

Tax - Assignment question - bond income inheritance

 
Picture of Jenny Dunn
Tax - Assignment question - bond income inheritance
by Jenny Dunn Send a message - 22 Aug 2019, 5:39 PM
 

Hi guys, 

I am taking Tax 1 online and have been stuck on the last assignment for weeks.
One of the questions I still cannot figure out is calculating the fed tax payable for a taxpayer for this item:  The taxpayer's 9 year old daughter (who is disabled and qualifies for the DTC) earns an inheritance of $5.5k interest income on bonds acquired (this comprises her total income). 

What I've determined:
- the $5,500 will be filed in the mother's tax return, on behalf of the child (the income is attributable to the beneficiary which is the child)

- the child is responsible for any associated tax amounts (although these amounts aren't given)

- i have calculated a kiddie tax of $1,279.50 on the $5,500 (for year 2017)

- I do not know if section 18(1)(g) or Registered Disability Savings Plans are applicable to this question (the former allows for the payments on income bonds to be deducted if they provide financial relief and the later could provide the minor with tax savings, however, I am not sure if the $5,500 can be transferred into an RDSP since it may not constitute a qualified investment)...

ANY help or insight would be appreciated. I might be making this more complicated then it needs to be. I uploaded the question as an attachment to this post. 

Ty

- Jen

Picture of Neville Feltham
Re: Tax - Assignment question - bond income inheritance
by Neville Feltham Send a message - 22 Aug 2019, 6:45 PM
 

A couple of questions (assuming the question is only pertaining to the taxable income of the child and not the mother):

- are you applying both the attribution rules and the kiddie tax rule?

- will the child have any taxes owing?

- is the entire $5,500 taxable?

- is there a tax on inheritance?


Picture of Jenny Dunn
Re: Tax - Assignment question - bond income inheritance
by Jenny Dunn Send a message - 24 Aug 2019, 12:53 AM
 

Hi Neville, 

Thanks for your response. I looked at this again and determined that the child should report the income on their own return (the mother should probably file this separately). 

The $5,500 is the entire amount earned by the child, however, since it constitutes 'unearned income' from investment property the kiddie tax may apply... regardless, after the various credits are applied (individual etc) i dont think the child has any remaining tax payable. 

There is no tax on the inheritance mentioned. I think we assume that the transferor is paid up until his death (and transfer to the child). 

I was thinking the amount could be put into an RDSP, however, it seems like only 'qualified investments' may be transferred into this, and I am not sure if this type of bond is applicable for that.. 

:/