What is the Kiddie Tax?

The kiddie tax was introduced in 2000. The purpose of this tax is to prevent high income individuals from being able to reduce their taxes by income splitting company dividends to their children. The way the kiddie tax works is that the first $1,000 of income is tax free and the second $1,000 is taxed at a lower child’s rate. If the amount is higher than $2,000 then the kiddie tax is applied and they are taxed at the marginal tax rate.

The kiddie tax will be applied if the child falls into one of these categories:

  • Is under 18 years of age at the end of 2015.
  • Is 18 years of age at the end of the year and has earned income which is less or equal to half of their support.
  • Is between 19-23 and a full time student at the end of the year and has earned income which is less than or equal to half of their support.

When the child is under 18 years of age with a parent that is a resident of Canada and they have been transferred dividends from a company the federal tax rate of 29% is applied. The child can only use the dividend tax credit and not any other credits to lower their taxes on the dividends. There are two ways to report your child’s kiddie tax. You can report the child’s investment income on the parents’ tax return using Form 8814 or the child can file a separate tax return using Form 8615. The tax with either option will be the same.