2011 Federal Budget—Tax on Split Income—Capital Gains

The federal Budget tabled on June 6, 2011 included no changes to the income tax measures originally announced in the Budget on March 22, 2011.

In 2000, a tax often referred to as the “kiddie tax”, but officially referred to as “tax on split income”, was introduced. This tax was intended to reduce income splitting and was targeted, at dividends received on shares held by minors in private corporations. (The original measures also dealt with income other than dividends, and were amended subsequently to broaden their scope, in response to certain other planning techniques.) The existing legislation subjects such dividends to tax at the top marginal tax rate, notwithstanding the marginal tax rate that would otherwise be applicable to the minor on such income. Prior to the Kiddie Tax Amendments, it was possible to significantly reduce the effective combined corporate and personal tax levied on business income by paying dividends out of after-tax corporate earnings to shareholders who were minors. However, when the Kiddie Tax Amendments were introduced, they did not apply to capital gains realized by minors. Budget 2011 proposes a new measure specifically designed to prevent certain planning techniques implemented since the Kiddie Tax Amendments. The tax on split income will be extended to capital gains included in the income of a minor from a disposition of shares of a corporation to a non-arm’s length person, if taxable dividends on such shares would have been subject to the tax on split income. These capital gains will be deemed to be dividends and therefore, subject to tax at the top marginal rate. Furthermore, the lifetime capital gain exemption will also not be available with respect to such disposition. This proposed amendment will apply to capital gains realized on or after June 6, 2011.




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