Understanding the KiddieTax, Part 3

The 2011 Federal Budget has introduced a new legislation whereby after March 22, 2011 such capital gains will now be subject to the “Kiddie Tax.”  However, other capital gains realized by a minor (for example, from a publicly traded portfolio of assets or shares of a private corporation disposed of to an arm’s length person) will continue to not be subject to the “Kiddie Tax.”  As such, capital gains realized and taxable in the hands of a minor either directly or indirectly is still a common and effective income splitting tool in many cases.

Also, partnerships and trusts that provide services to arm’s length parties are also not subject to the “Kiddie Tax”.  Let’s say that a mom, dad, the kids and a trust all form a partnership.  The partnership’s purpose is to sell food and drink (something a whole family could do).  When the partnership receives profits it can allocate these profits to the partners, which include the minors.  Typically no “Kiddie Tax” would be applied in this instance.

There are other ways to avoid this “Kiddie Tax” as well, such as simply paying the minor for work rendered.  When your children work for you it can be legitimately be their income and taxed in their hands at a much lower rate.

The “Kiddie Tax” definitely makes the family income splitting more difficult, however there are ways to effectively split income.  Careful planning with professionals must be done before implementing any plan.  On top of the current rules making it more complex, the changes in income tax laws each year make it even more difficult.  Thus, if you are looking for ways to income split, don’t hesitate to contact us as we would be glad to plan with you!  Our professionals along with our strategic alliance of tax lawyers can help you plan for all types of tax savings!

This concludes are blog series on the Kiddie Tax. I hope you now have a better understanding of its rules and how it can impact your tax saving strategies! 

Understanding the KiddieTax, Part 2

Another common plan prior to January 1^st, 2000 was to have a partnership whereby the child (or a trust of which the child was a beneficiary) would be a partner and have the partnership receive income from a related entity.  For example, the partnership could provide consulting services to a corporation owned by the parents.  The income received by the partnership could then be allocated to the partners, including the minor child, thus providing for simple yet effective income splitting.

Now both of these income splitting plans are subject to the “Kiddie Tax” to the extent that the income is received by a minor child.  As with most tax rules, many people do not know or understand these rules so it is best to educate yourself (such as you are in reading this blog) and plan with professionals, such us Kustom Design.

One of the typical types of income that is not split income and therefore not subject to the “kiddie tax” is capital gains.  Many plans were set up that involved related corporations that were structured to realize capital gains income.  These plans mainly involved having shares of the corporation being sold to a related corporation and resulting in a capital gain that is taxable in the child’s hands.  Prior to the 2011 Federal Budget, such a plan was often used to the extent that the accountant and/or tax lawyer and their client believed that the general anti-avoidance rule (“GAAR”) would not apply.  The Canada Revenue Agency(CRA), however, was not amused and would often times apply the GAAR to such a plan (with many cases still in the system).  New legislation was then introduced through the 2011 Federal Budget.

We’ll continue our discussion on this new legislation as well as how the Kiddie Tax applies to partnerships and trusts next week.  

Understanding the KiddieTax, Part 1

On January 1^st, 2000 the “Kiddie Tax” came into the Canadian law books.  The main purpose of introducing this new tax was to deter the many Canadians from income splitting with their kids.  Before January 1^st, 2000 many Canadians would simply structure their affairs so investment income was realized in their kids hands, thus having a much lower tax rate (many times no tax was realized).

This “Kiddie Tax” applies to certain types of income that is structured in ways so the minor child receives the income.  We are speaking of kids under 18 that belong to Canadian resident parents.  This “Kiddie Tax” makes it so that instead of the minor child paying income tax at a lower rate (or no tax at all), they end up paying the highest tax rate possible!  Planning around this rule is a must when planning income splitting with your kids.  Of course the minors may not be able to afford to pay this tax, so the parents end up being liable for the tax as the ultimate liability for “Kiddie Tax” rests with the parents.

The most common type of income to which the “Kiddie Tax” applies is dividend income from corporations and trusts.  Before the new “Kiddie Tax” it was regularly part of the plan to structure affairs using a trust that receives dividends and then would flow it out to the minors which would pay little to no tax.  Some structures even allowed minors to receive dividends directly from a corporation of which they were a specified class shareholder.  Before the “Kiddie Tax” this simple plan was very effective in saving tax as the child could use up their personal tax credits and pay tax in much lower tax brackets.  In fact many times there was no tax to pay if the income was kept under certain levels.

We’ll continue our blog series on the Kiddie Tax on Thursday. Please check back! 

Improving your Credit & Maximizing your Borrowing, Part 4

Here are your rights within the Credit Reporting Act:

·         To be aware of what your credit says about you; and a list of everyone who has requested it recently.

·         Before any one is given access to your credit file, he or she must have your written or verbal consent or notify you by mailing you a notice.

·         Your report may only be given to a person seeking information only for the purpose of extending credit or collecting a debt; tenancy inquiry; employment or insurance verification; a direct business requirement.

·         The right to be told by a credit reporting agency the substance and sources of information it collects about you.

·         The right to know the name, address and phone number of the credit reporting agency responsible for preparing the credit file used to deny you credit.

·         If you are denied Credit due to information on your credit file, you are entitled to a free copy of your Credit File if you make a request within 30 days of denial.

·         The right to have investigated within a reasonable amount of time, information that you believe is inaccurate or outdated.

·         The right to have inaccurate information deleted from your credit record if a credit reporting agency’s investigation finds erroneous information.

·         The right to have disputed information on your credit file deleted if the credit reporting agency cannot verify it through investigation.

·         The right to include a brief statement that will become a permanent part of your credit record explaining your side of any dispute that cannot be resolved.

·         The right to have negative credit-related information, such as unpaid debts, judgments, and bankruptcies removed from your credit file after 6 years.

·         The right to sue a credit reporting agency on the condition that it deliberately or negligently violates the law.

There are many things to consider with Credit!  The Credit Bureaus are for profit companies, they are not government organizations.  Always do what you can to pay less interest and maximize your lending.  Sometimes the best time to get credit is when you don’t need it.  If you get a line of credit and don’t use it, you pay nothing until you use it!  Please don’t hesitate to contact us if you are looking for more info in regards to your credit or obtaining credit.