No, the government has not decided to impose a tax on the
number of children that you have. In tax
jargon, “kiddie tax” refers to a special tax on certain types of income “earned”
by a child under the age of 18. In
general, that income is income that has been generated through the efforts of
the child’s parent. For example, the
parent might have an incorporated business.
If a family trust holds shares of that corporation and receives
dividends that are flowed through to a child who is under the age of 18, the
dividend will be taxed as if the child paid tax at the top marginal rate of
tax.
The kiddie tax applies only in respect of specific types of
income. The types of income include
dividend income from private (i.e. family) corporations as well as business
income derived from a business of providing goods or services to a business
carried on by a relative. In contrast,
no kiddie tax applies to a dividend paid by a corporation that is listed on a
stock exchange.
The kiddie tax ceases to apply in the year that the child is
17 years old at the start of the year (i.e. the year the child turns 18). Unless the child is a prodigy and goes to
university at a young age, therefore, the kiddie tax will not apply to
university-age children. Therefore, it
still makes sense to establish a family trust for the purpose of splitting
family corporation income with university-age children.
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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.