Income Splitting – New Rules

In the last federal budget, the government announced plans for a special tax to discourage income splitting with minor children.

Presently, dividends paid on shares owned by minor children are taxed at the child’s marginal tax rate. The new rules introduced in the budget will impose tax at the top marginal rate on certain types of income received by children age 17 and under. The type of income subject to the tax will include:

· dividends on unlisted shares (whether received directly or through a family trust or partnership); and

· income from a partnership or trust arising from the trust or partnership providing goods or services to a business carried on by a relative of the child.

The tax will apply for the 2000 and later taxation years, with no exceptions for existing structures. It will not affect income splitting plans involving spouses or children age 18 and over.