July 16, 2012 0 comments

Kiddie Tax

One of the best tax saving opportunities for family owned and operated businesses over the years has been income splitting.  This is the practice of splitting income amongst family members to use up all of each family member basic personal tax credit and low tax rates at the lower income levels.  The Federal Government and Canada Revenue Agency (CRA) recognized this lost revenue and in the year 2000 put measures in place to reduce these income splitting opportunities.  These rules are generally referred to as “Kiddie Tax” and apply to these situations involving minor children.

Kiddie tax is applied on the following income:

• Dividends received and other shareholder benefits, directly or through a trust or partnership.  Income or benefits from publically traded shares are excluded.
• Business income from property or services provided to businesses in the following circumstances:
  • A corporation where a relative owns 10% or more of the shares
  • A person related to the minor is earning business income
  • A professional corporation where a relative of the minor is a shareholder
• Since inception the kiddie tax rule has been amended to capture the following circumstances
  • Rental or interest income earned by a trust or partnership from a family business then received by minor children
  • Capital Gains on the sale of private company shares

There are some exceptions to the Kiddie Tax:

• The Kiddie Tax is not applicable if neither of the minors parents are residents of Canada
• The tax is not applicable on property or income inherited from a parent
• The tax is not applicable on income from property inherited from others when the child is attending university, or is disabled

If the Kiddie tax rules are applied, all of that income will be taxed at the highest marginal tax rate, also personal tax credits cannot be used against Kiddie Tax related income.

Even though the Kiddie Tax rules are pretty tough and do eliminate a significant amount of income splitting opportunities, there are still opportunities for income splitting in family owned businesses and similar situations:

• There are still income splitting opportunities with your spouse and children 18 years old and older
• Salaries can legally be paid at non-kiddie tax rates to minor children for work done for the company.  Although you must be able to prove the work done by the child, and you must pay them the no more than the market rate to do this work.

If you are in a situation and think that you may get caught up in the Kiddie Tax rules, or if are looking to do some tax planning around the Kiddie Tax rules and you want to discuss it with a Chartered Accountant please contact us at steve@wattsca.ca , 604 510-0156, or visit our website at https://wattsca.ca for more information.

 

 

Disclaimer: The information in the blog is for general information only and is not intended to be a substitute for professional advice.  Each person’s situation is unique, and a designated professional accountant can assist you in using the information on this blog to your best advantage.  The author of this blog strives, but does not guarantee, to provide information which is current and accurate.  Due to the nature of the information, it should not be relied upon for decision making without talking to a designated professional accountant.  By obtaining information from this blog, you fully release Steve Watts, Chartered Accountant of any liability that may arise from using this information.