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 email@example.com.
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