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!