Income splitting; What
happened to "the
Kiddie Tax?"
Prior to 1999, family
trusts were a legitimate device for
splitting business-generated income with
children and family members. In February
1999, amendments to the Canadian Income
Tax Act that was effective in 2000, all
income received by minor children were
taxed at the top marginal rate from
dividend income arising directly or
indirectly from a private company.
Trust structures that
have been set up with minor children as
beneficiaries can still be altered to
retain some benefits. For example, a
holding company can be set up between
the operating company and the trust.
Operating company dividends that are
paid to the holding company are usually
not taxed. The income can be retained
until the minors turn 18. Presently,
they can receive approximately $24,000
per year in dividends without tax
liability provided they do not have any
other income.
Estate planning
Trusts allow
transfer of family assets in a tax
effective manner. A trust can allow you
to maintain control over the assets and
their income-earning potential during
your lifetime. For example, a person’s
family home and investment portfolios
can be transferred into the trust with
him/her as a trustee and a life tenant.
The transfer of assets may attract some
tax; there are many ways to approach a
transfer of an asset that will have
varying degrees of certainty with
associated costs for implementation.During
the settlors' lifetime, they retain
control over the investments and receive
the income taxable to their rate. On
death, the probate fees will be minimal
since they do not own any assets. The
assets will be transferred to their
beneficiaries.
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