Canada: The Grinch Who Stole Your Tax Break

Last Updated: January 13 2015
Article by Samantha Prasad

If you felt particularly generous this past Christmas, you may have transferred money or other property to your spouse or minor children or grandchildren. Your heart's in the right place, but the Canada Revenue Agency stands ready to play the Grinch to your Santa Claus. That's because those gifts can trigger tax rules that will attribute any resulting income on those assets – and the tax on it – right back to you. But there are a few tax goodies left that could help you cut the tax bill.

The so-called "attribution rules" that boomerang tax liability on transferred property or cash back to you are intended to curb your ability to split income with members of your family who are taxed at a lower rate – what the government calls "abusive" income splitting. Although it seems to be more abusive to government coffers than to Canadian families.

Specifically any income from the transferred property or funds will be included in your income, which will be taxed at your marginal rate. The attribution rules will also take effect in the case of a loan or incurred indebtedness on a transfer of property, unless the prescribed rate of interest is charged and paid for each year the loan is outstanding (the prescribed rate is currently 1%).

However, while capital gains realized on a sale or other disposition by your spouse will be attributable to you, capital gains will not apply to your minor children.

So the general rule has been to avoid making gifts of property or funds to a spouse or minor child.

New income-splitting rules

On October 30, 2014, the federal government announced a family-focused tax package that gave families the ability to split income with children under 18. Accordingly, under this new package, the attribution rules would be held in abeyance on the first $50,000 of taxable income, which can now be transferred from the higher-income spouse to the spouse in the lower tax bracket.

Beginning with the 2014 tax year, this measure will provide eligible families with a maximum of $2,000 a year in tax relief.

Only families with children under the age of 18 with two parents in different tax brackets will benefit from this new proposal. Accordingly, the new income-splitting measures would not benefit single parents or families where the spouses are in the same tax bracket.

Tax credit enhancements

So to throw a bone to those for whom the new income-splitting rule is not applicable, the government also introduced a number of other measures, such as the expansion of the Universal Child Care Benefit and an increase to the child care expense deduction.

Universal Child Care Benefit. The Universal Child Care Benefit for children under the age of six will be increased to $160 per month from $100. Additionally, a new benefit of $60 per month is being introduced for children between the ages of 6 and 17.

Although this expansion to the program will come into effect on January 1, 2015, payments will not begin until July 2015. Accordingly, there will be a lump sum payment at that time to cover the first six months of 2015.

Note that the enhanced Universal Child Care Benefit will replace the existing Child Tax Credit, which will be eliminated in 2015. Currently, the Child Tax Credit is equal to $338 per child (calculated as $2,255 per child multiplied by the 15% credit rate).

Child care expense claims. The maximum amount that can be claimed for child care expenses will be increased by $1,000. As a result, the maximum limits will be a) $8,000 for children under the age of seven; b) $5,000 for children aged seven to 16; and c) $11,000 for children eligible for the Disability Tax Credit. (There are no age restrictions for such children.)

Children's Fitness Tax Credit. The Children's Fitness Tax Credit will also be doubled, to $1,000 per child from $500, effective immediately.

Currently, this non-refundable credit is worth $75 if you spend $500 on fitness activities for your child (i.e., 15% of $500). Starting in 2014, this credit will be refundable (in addition to being worth $150), so that even a low-income taxpayer, who would not otherwise pay tax, could get a refund of $150 as a result of this credit.

So although the applicability of the new income-splitting measures is limited, it is possible to reduce the amount of tax your family pays as long as you make sure to take advantage of all of the family credits available. 

Originally published by The Fund Library

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Samantha Prasad
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