The Old are Young Again
It’s not exactly the fountain of youth, but
many Canadians might soon be treated for tax purposes as if they were once
again under 18 years of age. Enabling
legislation has to be passed into law, but this might come into effect as soon
as 2018.
Currently, Canadian income tax law applies
a special tax – colloquially referred to as the “kiddie tax” -- if a minor
child receives dividends or other income that has been generated by activities
of a parent. For example, this special
tax might apply if a parent carries on business through a private corporation
and the child receives dividends from the corporation. If the special tax applies, the dividend is
taxed at the top marginal tax rate applicable to that form of dividend – as if
the child were a top-rate taxpayer. This
removes any income-splitting benefit.
Under current law, the kiddie tax ceases to
apply in the year that the child reaches age 18. This means that income splitting can start in
the year that a child has his or her 18th birthday. As well, income can be split with one’s
spouse and with other adults.
Starting in 2018, the government intends to
significantly extend the “kiddie tax” rules.
The special tax will apply to all individuals – including spouses and
adult children – who are related to the principal of the business. For these extended rules, relatives will also
include uncles, aunts, nieces and nephews (who are not normally related for
income tax purposes).
The rules will apply to income that is
received directly on shares owned by the related individual or indirectly on
shares held through a family trust.
A limited exception will apply to the
extent that income paid to the related individual is reasonable in light of
services that the individual actually provides to the business. In general, the related individual will be
able to receive salary or dividends provided that the aggregate amount of the
salary and dividends does not exceed what would have been paid to an unrelated
individual performing the same services.
A more restricted exception applies if the individual is between the
ages of 18 and 24.
The new rules will not totally prevent
income-splitting with other family members.
However, income splitting after the end of 2017 will require that the
family member actually work for the business and will be limited to a level
that is reasonable in light of those services.
The proposed rules will not affect other
forms of income-splitting techniques, such as loans made to a spouse at the
prescribed rate of interest.
The new proposals are included in draft
legislation that was released on July 18, 2017.
This draft legislation includes significant other changes that will be
described in future blogs.
The federal government has invited comments
on the draft legislation. Comments can
be made prior to October 2, 2017 by sending the comments to fin.consultation.fin@canada.ca.
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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.