July 1999 volume 3, issue 2 

Now that tax season is over, let’s review some of the ways the Federal Government’s 1999 budget affected our accumulation of wealth.

In the budget, certain types of income splitting with minor children were attacked with the introduction of a new income splitting tax for the year 2000 and beyond. The introduction of a proposed tax at the top marginal tax rate of approximately 50% (federal and provincial) on certain types of income received by minor children, replaces the income taxes previously applied at the lower marginal rates to income received by a minor.

The types of income that are subject to the new tax are as follows:

• Taxable dividends and other shareholder benefits on shares of private Canadian company shares, whether received directly by the minor or through a trust.
• Income from a partnership or trust earned from a business, or providing goods or services to a business carried on by a relative of the minor, or a business in which the relative participates.

Unfortunately, the new income splitting tax (nicknamed the “kiddie tax”) means Canadians will pay more tax after 1999 if their trust receives any of the above types of income, and allocates that income to minor beneficiaries. However, financial benefits can still be provided by family trusts:

• Employment or personal service income rendered by the minor is not subject to the new tax.
• Interest income is not subject to the new tax.
• Capital gains realized on investments of the trust, including private corporations, and dividends from publicly traded shares owned by the trust are not subject to the new tax.
• If the trust beneficiary is a child aged 18 or older or a spouse, the new rules do not apply; income splitting can still be accomplished by allocating dividend income to these individuals.
• Interest earned on funds loaned to a family business by the trust is not subject to the new tax.
• Since the implementation date of the new rules is after 2000, you still have 1999 to benefit from income splitting.
• Trusts will still be an effective way to save for your children’s education, as you defer dividends to the trust until your child reaches the age of 18. After the age of 18, the income splitting can be achieved as they attend post-secondary education.

While income splitting is important, a trust is still an extremely useful way to achieve your objectives in estate planning and wealth preservation. A trust is most useful in:

• successful planning of a business
• probate fee planning
• family law planning
• minimization of income taxes on death
• multiplying the availability of the qualified small business corporation capital gains deduction

If you have a trust structure, it’s still worthwhile. If you think you need one, consult your Wilkinson & Company LLP partner.

Wayne Phillips, CA, shares his knowledge and ideas with clients to help them succeed. Wayne enjoys the many challenges of helping clients achieve success through the cycle of change and firmly believes a problem is "only a solution waiting to happen".