“Kiddie” Tax Net Continues To Expand

One of the more popular tax planning strategies is “income splitting.” To the extent income can be shifted within a family unit from a higher income earner to a lower income earner, less income tax is paid and more after-tax income is retained within the family unit.

As one might guess, the government has a wide array of tax laws to maintain fairness and ensure tax revenues are not inadvertently stifled through income shifting. The shifting of income among family members within the context of family- owned businesses was commonplace in the 1990s. To curtail the common strategy of paying dividends to minors on shares of private non-arm’s length companies owned by a trust, a new tax referred to as “kiddie tax” (or more formally, “tax on split income”) was introduced in the 1999 federal budget, beginning with the 2000 taxation year. Rather than attribute the dividends to the parent, kiddie tax was structured to tax the dividend income in the hands of the minor child, but at the highest marginal tax rate.

The kiddie tax rules were expanded in the 2011 federal budget to include capital gains realized by minors on the sale of private company shares to a non-arm’s length person. The rules deem that the capital gain realized is re-characterized as a taxable dividend. Effectively, this prevents the ability to make use of the preferred rate of taxation available for capital property, and to access the capital gains exemption when the shares are disposed of in a non-arm’s length situation.

The 2014 federal budget proposes to expand the kiddie tax rules even further. It states that, to the extent a minor realizes business or rental income from certain partnerships or trusts, the income will be treated as “split income.”

In simple terms, the kiddie tax rules identify situations where income is earned by a minor from private company shares, and redefines that income as “split income.” Split income is removed from the calculation of regular taxable income for the minor, and is instead taxed at the top federal marginal tax rate plus the top marginal tax rate for the province of residence. The tax on split income and the tax on regular taxable income are added together to determine the minor’s overall income tax liability for the year.

In general terms, split income is defined as:

  • Taxable dividends received by a minor from a private corporation;
  • Capital gains realized on the disposition of shares of a private corporation to a non-arm’s length party;
  • Shareholder benefit amounts realized by the minor from private corporations;
  • Partnership income allocations derived from the provision of goods, services or property rental to a non- arm’s length entity (i.e., sole proprietorship, corporation, partnership);
  • Allocations of income from a trust that can reasonably be considered taxable dividends or shareholder benefits from a private corporation; or
  • Income derived from the provision of goods, services or property rental to a non-arm’s length entity.

It should be noted that the kiddie tax rules do not apply to income received on property inherited by the minor as a consequence of the death of a parent, or as a consequence of the death of any person, if the minor is enrolled during the year as a full-time student at a post-secondary educational institution, or the minor qualifies for the federal tax credit for mental or physical impairment.

E.O. & E.

Disclaimer:

This commentary is published by the Institute in consultation with an editorial board comprised of recognized authorities in the fields of law, life insurance and estate administration.

The Institute is the professional organization that administers and promotes the CLU and the CHS designations in Canada.

The articles and comments are not intended to provide legal, accounting or other device in individual circumstances. Seek professional assistance before acting upon information included in this publication.

Advocis*, the Institute for advanced financial education.

(The Institue”), CLU, CHS, FHF.C and APA are trademarks of the financial advisors Association of Canada (TFAAC).

The institute is a wholly-owned subsidiary of Advocis. Copywrite TFAAC. All rights reserved. Unauthorized reproduction of any images or content without permission is prohibited.

Copywrite  ISSN 0382-7038

Contributors to this edition:

James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.

About The Author

Avatar
Mark Schneider
Mark Schneider is one of Canada's leading Chartered Financial Planners. For over 30 years he has helped hundreds of regular Canadian families grow small fortunes through consistent planning and wise advice. He holds the following designations: CFP, CLU, CHFC, CFSB

Get ready for your new life. It’ll be a great ride!

OUR

MA Scheneider

Perspectives Articles

The standard approach for determining insurance need begins with disco...

SCHNEIDER INSURANCE UPDATE

Despite mixed earnings,  an ongoing pandemic and the threat of consid...

Thoughts on “The Psychology of Money”

We’re regularly working towards improving our education so that...

THE WORLD’S FUTURE REMAINS BRIGHT

There’s a cognitive bias known in Behavioral Economics named Los...

SCHNEIDER INSURANCE UPDATE

With the exception of some volatility in the last few weeks, stock mar...

WHY WE NEED A NEW (SMALL TO MIDSIZED) HOUSING BOOM IN CANADA

We’re not only in a pandemic, but we’ve also got a national housin...

We Celebrate Savers

At M.A. Schneider Insurance, we believe the saver deserves to be celebrated.

After all, it’s the saver that is conscientious every day to gradually create wealth for all.

That habit not only creates security for them but for their families and for the community as a whole.

We think they sometimes lose sight of how important they are.

This blog is here to help them. To help inspire them to stay the course and ultimately lead the great lives that they deserve.

Here’s What to Expect

1. Insight we gather about what’s going on that may affect the long-term quality of your life…

While there is a lot on the Internet, we know that making the best decisions for your life is often based on knowing just what your options are.

2. We hope that understanding what’s going on will help with perspective on what you can do.

3. New innovation and resources you can seek out.

This blog will offer an insight into the future because whether we like it or not, we’re going there. We’ll do the research to find the innovations that you should know about.