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.