Line 424 – Federal tax on split income

Certain types of income of a child who was born in 2000 or later are treated differently. It is subject to a special tax, but also qualifies for a deduction.

Split income includes the following amounts:

  • shareholder benefits (other than from ownership of shares of a class listed on a prescribed stock exchange) conferred on the child, whether directly or through a partnership or trust (other than a mutual fund trust);
     
  • taxable amount of dividends (eligible and other than eligible) from ownership of shares of a corporation (other than from shares of a class listed on a prescribed stock exchange and those of a mutual fund corporation), whether received directly or through a partnership or trust (other than a mutual fund trust);

Note

If the child disposes of shares to a person with whom they do not deal at arm's length, and dividends on the shares would be subject to the tax on split income, then the capital gain arising from the disposition is deemed to be a taxable dividend. The deemed dividend is not an eligible dividend.

  • income received by the child from a partnership or trust (other than a mutual fund trust) that came from income that a partnership or trust earned from providing property or services to, or in support of, a business carried on by:
    • a person related to the child at any time in 2017;
    • a corporation that has a specified shareholder who is related to the child at any time in 2017; or
    • a professional corporation that has a shareholder who is related to the child at any time in 2017.
       
  • income received by the child from a business or rental property of a partnership or trust (other than a mutual fund trust), if a person who is related to the child at any time in the year:
    • actively participates on a regular basis in the activity of the partnership or trust of earning that income; or
    • in the case of a partnership, has an interest in the partnership directly or indirectly through another partnership.

However, the special tax and deduction do not apply if:

  • the income is from property the child inherits from a parent;
  • the income is from property inherited by the child from anyone else and, during the year, he or she either is enrolled full-time in a post-secondary institution or is eligible for the disability tax credit (line 316 on Schedule 1);
  • the child was a non-resident of Canada at any time in the year; or
  • neither of the child's parents were residents of Canada at any time in the year.

Example

Candace is 13 years old and is a shareholder in a corporation. The corporation pays her $10,000 a year in dividends.

Candace reports the income on the appropriate lines of her return. However, she can claim a deduction on line 232 for this income.

Completing your tax return

The child must report the income on the appropriate lines of his or her return. However, he or she can claim a deduction on line 232 for this income.

To calculate your child's tax on split income, complete Form T1206, Tax on Split Income. The special tax is included in the calculation of his or her federal and provincial or territorial taxes.

Supporting documents

Filing electronically

Keep all of your child's documents in case we ask to see them at a later date.

Filing a paper return

Attach Form T1206 to your child's paper return.

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