Subsection 120.4(1) - Definitions
Excluded Amount
Administrative Policy
26 March 2013 T.I. 2012-0465001E5 - kiddie tax
The minor child of the owner of a Canadian-controlled private corporation purchased the shares of the CCPC with money received in universal child care benefit and Canadian child tax benefit payments. In response to an inquiry respecting the application of s. 120.4 on the payment of dividends by the CCPC to the child, CRA stated:
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%.
split income
(c)
Administrative Policy
10 March 2014 Memorandum 2013-0493971I7 F - Application of section 120.4
X "split" his professional income with a limited liability partnership (SENCRL) of which one of the partners was a trust for the benefit of related minors.
The pre-2014 version of the split income definition did not apply "due to the fact that the income of the [SENCRL] or of the trust was not derived from the provision of property or services" [TaxInterpretations translation].1) - split income - (c) However,
the addition of clause (c)(ii)(D)…appears to suggest the intention of the Department of Finance to rectify the scope of what is included under section 120.4 in situations such as described here. … [T]he addition…could solve the problem in this case, but only for the 2014 and subsequent taxation years.
11 October 2013 APFF Roundtable Q. , 2013-0495651C6 F
A discretionary family trust with Father, Mother and a 15-year old Child as beneficiaries, holds a building with two premises – the first leased to an arm's length tenant; and the second, to a professional corporation of Father and Mother. Could the split income tax be avoided if the trust distributed only the income from the first premises to Child, and the income from the second premises to Mother? In concluding (per the summary) "Yes, when the trust indenture allows such attribution [sic, allocation and distribution]," CRA stated (TaxInterpretations translation):
In some instances, the deed of trust permits the allocation to two separate beneficiaries of the income derived from a building, so that one portion of the income, which adheres to [i.e., is not caught by] the conditions in clause (c)(ii)(C) of the "split income" definition in subsection 120.4(1), can be distributed to a specified individual even though the other portion of the income does not so adhere. In such a situation…that part of the income distributed to a specified individual that it is reasonable to consider as income described by clause (c)(ii)(C)…would be considered as "split income"… .
Articles
Joseph Frankovic, "Income Splitting and Attribution", Tax Topics, Wolters Kluwer, No. 2250, April 23, 2015
[T]he rules were introduced in 2000 in response to certain tax planning scenarios that circumvented the income attribution rules and were sanctioned by the courts (e.g., Ferrell, 99 DTC 5111 (FCA)).
Split income includes dividends and taxable shareholder benefits received from a corporation, either directly or through a trust or partnership, but not including dividends from a corporation whose shares are listed on a designated stock exchange or a mutual fund corporation. Additionally, in response to certain schemes under which minor children would sell their shares to their parents (or other non-arm's length persons) as a way of avoiding the split income tax (and potentially claiming the capital gains exemption), amendments introduced in the 2011 federal Budget provide that the amount of a minor child's taxable capital gain from a disposition of shares to a non-arm's length person is deemed not to be a taxable capital gain, and twice the amount is deemed to be a dividend that is not an eligible dividend. The split income tax on dividends can therefore apply.
Subsection 120.4(4) - Taxable capital gain
Administrative Policy
10 June 2013 STEP Roundtable Q. , 2013-0480261C6
underline;">: Crystallization transaction. A child of parent seeks to crystallize an accrued gain on shares of Opco, which is controlled by parent, by transferring those shares to Opco in exchange for Opco issuing shares. As the child disposed of the shares to a non-arm's-length person, s. 120.4(4) would apply to deem the child to have received a taxable dividend equal to twice the amount of the taxable capital gain.
s. 48.1(1) does not apply
As expressly provided in s 48.1(1), a capital gain realized by a specified individual as a result of a deemed disposition under s. 48.1(1) is not subject to the tax under s. 120.4.
No s. 83(2) election
As ss. 120.4(4) and (5) only deem twice the amount of taxable capital gains to be received as a taxable dividends, and do not deem any amount to be paid by the corporation, a dividend refund is not available under s. 129(1) nor is a capital dividend election under s. 83(2).