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! 

Maximizing the use of your corporation Part 3

In the last couple blogs we’ve been discussing some of the ways you can maximize the use of your corporation.  At this time I’d like to remind you that although we’ve covered a lot of information on corporations in this large blog series, we cannot cover it all via blog.  If you have questions on what I am covering or anything I am not covering do not hesitate to contact me.  Also remember that educational articles, such as this one, should be used in conjunction with good planning!

The next thing to discuss in maximizing the use of your corporation is further lesson on dividends.  We have been discussing dividends in this blog series, as well as other blogs, and you can see by now how beneficial it can be to use dividends to save tax.  Remember that corporations can issue dividends to shareholders as long as the corporation has positive retained earnings (sum of profits less dividends declared since the corporation’s inception).  One of the main concepts in tax is to get the lowest overall tax paid between all family members and entities owned and controlled by the family.  So now if we combine that concept with dividends you are looking at big tax savings.  The ideas combined here are to keep all family members at the lowest tax brackets possible using tax favorable types of income. (dividends in this case).  Some of the main options to look at in this maximization of tax savings are to add other family members as shareholders of the corporation(s) or to ensure all your family members are beneficiaries of the family trust if you have one.  Either way you are now able to split dividends amongst family members giving you more options for income splitting and tax savings, with no additional liability.  In the case of the trust you can also split capital gains among beneficiaries. 

Another thing to talk about in looking at dividends from your corporation is Capital Dividends.  Capital Dividends are issued tax free by the corporation and received tax free by the shareholders.  Capital dividends arise out of Capital Gains in a corporation.  When a corporation has a capital gain it only pays tax on 50% of the gain, which is the same as when an individual has a capital gain.  So in essence Capital Dividends are issued out of the 50% non taxable profit arising out of a capital gain in a corporation.  Again, Capital Dividends are non taxable!

Maximizing your trust – other considerations

As we have been discussing trusts for the last couple of months you should have a good understanding of the basics of a trust. There are many uses for a trust and in this series of blogs we are mostly discussing the use of family trusts. There are numerous other types of trusts and they all operate similarly in the fact that they all have the 3 same factors: 1. Settlor 2. Trustee(s) 3. Beneficiaries. We will now do some recap on a few items and discuss some other considerations of having a trust.

Family Trusts are very effective when used to hold assets and distribute cash flow. We must remember that income that is left inside of the trust is taxed at the highest marginal tax rate, however the trust is allowed specific tax deductions and tax credits such as dividend tax credits, capital gains deductions, donation credits etc. Income can flow through a trust, however losses cannot typically be flowed through the trust. The losses can be used against income in the trust, carried forward, or carried back up to 3 years to apply against income of other years. If you have paid tax in the past and apply for a loss carryback you may receive a tax refund of the taxes you paid in the prior years you are applying the loss to. This is similar for individuals and corporations.

Also remember that a trust has a $750,000 Lifetime Capital Gains Exemption, which is the same as every Canadian individual taxpayer. This is key for the sale of small business shares, farm property or fishing property. Because all of the beneficiaries have the same exemption this could allow for millions of dollars in qualified capital gains which could be exempt from tax.

Another rule of most trusts that CRA has put into place is the 21 year deemed disposition rule. This rule means that 21 years after the asset was acquired you will have to claim the tax on the the current fair market value less the cost of the asset and improvements to the asset. This is done every 21 years. This rule can be avoided by distributing property to the beneficiaries before the 21^st year, or by providing in the trust that the property will indefeasibly vest in the beneficiaries prior to the disposition.

One last thing to discuss is the option of a trust acquiring a beneficiary’s principal residence. The sale should be a real sale with actual funds changing hands. There is typically no tax advantages to selling your principal residence to a trust as you do not pay capital gains tax when you sell your principal residence. The only reason you may want to sell your principal residence to the trust is for the potential of liability protection. Other real estate however should be sold to the trust or a corporation owned by the trust. This property that the trust acquires can be almost anywhere in the world as the trust can also have non resident beneficiaries.

There are so many ways to plan using a trust and we have discussed a lot of the basics. Please do inquire with questions on trusts, structuring and planning. We look forward to hearing from you!

Income Splitting

Many types of income can be split, only a few of them can be split at the time of filing the tax return if you have not yet done what is required prior. Business income can be split in many ways, by paying wages, dividends, bonuses and more. Wages can be paid for work the spouse has done, dividends can be utilized if the spouse is a shareholder, and bonuses can also be paid to spouses. Capital Gains income can be split by either purchasing the asset jointly, or flowing the Capital Gain through a Family Trust. Dividends can also be split easily using the family trust. CPP and Pension income may also be split. With CPP you must apply with Service Canada to split the income, however with other pensions you can typically just split it right on the Tax return. RRSP income may be attributed to the other spouse if they are made the Annuitant. Some RIFF income can also be split between spouses. So as you can see much of the income from investments, businesses and Pensions are able to be split between spouses. Don’t forget to include your kids in income splitting where possible.