The so-called kiddie tax is not an income attribution rule because it applies to a minor child rather than attributing income back to a parent of the child. However, since it applies at the highest marginal rate of tax, it is just as detrimental as (or worse than) the attribution rules.
The kiddie tax applies to the “split income” of a child under the age of 18. Split income includes shareholder benefits and dividends received from shares of private corporations. It does not include dividends from public corporations or mutual funds.
It also includes income of the child from a trust or partnership that is derived from services or property provided to a business in which a parent is involved (more specific conditions apply). It can also apply to income from a trust or partnership where the trust or partnership provides services to a third party and the parent is actively involved in the provision of the services.
Split income also includes a minor child’s gain on the sale of shares of a private corporation to a nonarm’s length person. The gain is deemed not to be a capital gain, but rather a dividend that is included in split income. The gain therefore cannot qualify for the capital gains exemption, which otherwise exempts from tax the gains on the sale of shares in certain small business corporations.
The tax on split income does not apply as of the year in which the child turns 18. Additionally, it does not apply to income or gains from property inherited from the child’s parent, or from anyone else if the child is enrolled full-time in post-secondary education or is disabled.
In many cases, the parent of the minor child will be jointly and severally liable to pay the tax on split income. This means the CRA can proceed to collect the tax from the parent along with the minor child or instead of the minor child.