Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Are payments of dividends by a Canadian controlled private corporation (CCPC) to a minor child taxable under section 120.4?
Position: Depends on the facts but the dividends are probably taxable under section 120.4.
Reasons: The law.
XXXXXXXXXX
2012-046500
N. Shea-Farrow
March 26, 2013
Dear XXXXXXXXXX:
Re: Technical Interpretation Request Kiddie Tax
We are writing in response to your letter of September 19, 2012 requesting our comments with respect to the application of section 120.4 of the Income Tax Act (the "Act") on the payment of dividends by a Canadian controlled private corporation (CCPC) to a minor child.
The situation as you describe it is that the child of the owner of the CCPC purchased the share(s) of the parent-owned CCPC with money received in UCC/CCTC payments. We assume that UCC is meant to refer to the universal child care benefit (UCCB) and we are not sure if CCTC refers to the child care tax credit (CCTC) or if you mean Canadian child tax benefit (CCTB). We assume you mean the CCTB.
Our comments
Written confirmations of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year. Notwithstanding the foregoing, we are prepared to provide the following comments that may be of assistance.
The individual that is taxed pursuant to section 120.4 is referred to as a specified individual. A specified individual is an individual in relation to a taxation year that has not attained the age of 17 before the end of the year and was not a non-resident at any time in the year and who has a parent who is resident in Canada at any time in the year. The specified individual is taxed at a rate of 29% on the individual's split income for the year.
Split income is defined in section 120.4 and amongst other things, it includes taxable dividends received by the individual in respect of shares of the capital stock of a corporation, other than shares listed on a designated stock exchange whether received directly or indirectly through a partnership or trust. Split income does not include an "excluded amount".
An excluded amount means an amount that is the income from, or the taxable capital gain from the disposition of, a property acquired by or for the benefit of the individual as a consequence of death of:
1. a parent of the individual; or
2. any person, if the individual is
i) enrolled as a full-time post-secondary student, or
ii) if an amount may be deducted in respect of the individual under section 118.3 for mental or physical impairment.
An excluded amount does not include taxable dividends received by a specified individual in respect of shares in a CCPC that were purchased with money received from the UCCB even if the UCCB has been designated to that child under subsection 56(6.1) and is therefore included in the child's income, or the CCTB. These taxable dividends would therefore be included as split income for the specified individual and taxed at a rate of 29%.
We trust our comments will be of assistance to you.
Yours truly,
Sharmini Ratnasingham
For Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2013
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2013
Email this Content