Income tax rates in Canada are determined by the taxable income of the taxpayer in the
calendar year. At present the first $29,590 of taxable income is taxed at the rate of
approximately 25%, the next $29,590 is taxed at about 40% and any income above $59,180
attracts income tax at rates approaching 50% or more depending upon the province in which
The ideal tax plan for a family of any income is to have each member of the household
report a taxable income that falls in the same tax bracket. This means that each dollar of
income is attracting the same amount of tax no matter which member of the family is
earning the income.
Income splitting is the mechanism that is employed by the taxpayers who endeavor to
work their income tax situations into a position where all family members are being taxed
in the same bracket. Unfortunately, income splitting was dealt a serous, but not fatal
blow when the Federal Government introduced its 1999 budget last February. One of its
provisions has been termed The Kiddie Tax because it concerns income splitting with
children under the age of eighteen.
Form many years the government has been quite aware of the goal of income splitting and
has introduced attribution rules into the Income Tax Act that are designed to prevent over
zealous taxpayers from aggressively shifting incomes from adult parents to minors.
Two techniques were very common. One involved setting up an incorporated company to
pursue the business interests of the parent. The ownership of the firm was structured so
that its share capital was owned by a family trust. This trust would receive dividends
from the corporation, and in turn, allocate the dividend income to minor beneficiaries who
would pay little or no income tax on the income. In fact, a child having no other income
could receive approximately $23,500 per annum in dividends free of income tax as a result
of the Basic Personal Exemption and the gross up and credit mechanism attached to dividend
The second technique was the establishment of a partnership that would provide services
to a related entity at a profit. A family trust would own the partnership interest and
would allocate the income to minor beneficiaries in a similar manner to that indicated
Commencing January 1, 2000 the government will impose a special tax on dividends
received from private corporations and on income derive from certain trusts and
partnerships. And, in order to avoid having to prosecute young offenders who do not pay
the tax, a parent resident in Canada who is active in the business, will be jointly and
severally liable for the tax should the minor not pay it.
Let us consider an example: Suppose Erin is 15 years olds in 1999 and has the following
income for each of 1999 and 2000: $2500 from a part-time job and $5,000 in taxable
dividends that were paid through a trust from a private family corporation.
For 1999, Erins taxes will be $NIL. This is because her Basic Personal Exemption
and Dividend Tax Credit protect her tax-exempt status.
In the 2000 taxation year, however, her situation will change considerably. The sources
of her income will be analyzed and taxed according to how that income was generated
The employment income from the part-time job will not attract any tax, as it is lower
than the Basic Personal Exemption.
The taxable dividends will be taxed separately at the highest marginal federal tax
rate. Only the dividend tax credit will apply, and the final tax bill will be in excess of