Income splitting is the process of shifting income within a family to take advantage of the lower tax brackets, deductions and credits available to each family member. Anti-avoidance legislation was introduced in 2000 to prevent income splitting with minor kids. It is known as “kiddie tax.” The splitting of income is now restricted by taxing all minor children at the highest marginal tax rate which is 29%. The objective of this legislation is to discourage taxpayers from shifting income to lower tax bracket minor individuals through the use of taxable dividends or taxable benefits through the use of corporate shares that are not listed on public stock exchange.
Following is the criteria that an individual may be subject to kiddie tax:
– A person who has not obtained the age of 17 years before the year
– Person was at no time in the year a non-resident of Canada
– Person has a parent who is resident in Canada at any time in the particular year.
If a child invests funds in capital gain producing assets then the return would not be subject to kiddie tax but may be subject to GAAR (general anti-avoidance rule)
2014 Budget Proposal
2014 budget is proposing to amend Income tax Act and retroactively expand the application of “kiddie tax” to certain partnership and trust arrangements.