- The rules target what’s called "split income" — broadly, certain types of income (like dividends from a private company, or income allocated from a related trust or partnership) that…
- Before these rules were introduced and later expanded, it was common for business owners to issue low-value shares to a spouse or children, then pay dividends disproportionate to what…
It’s a tempting idea: give shares in the family business, or units in a family trust, to a minor child, and let dividends flow to them at a lower personal tax rate than the parent would pay. For decades this was a genuine income-splitting strategy. Today, a set of federal anti-avoidance rules — often nicknamed the "kiddie tax" — shuts most of that door for minors, and a related expansion now reaches many adult family members too.
If you’re weighing whether to put a minor child on the share register of a family corporation, or name them as a beneficiary of income from a family trust, understanding why this backfires matters before you set anything up.
What the "Kiddie Tax" Actually Does
The rules target what’s called "split income" — broadly, certain types of income (like dividends from a private company, or income allocated from a related trust or partnership) that ends up in the hands of a family member instead of the person who actually generated the value. When income earned this way lands with a minor child, the rules tax it at the highest personal marginal rate that applies — not at the low or nil rate a child’s own modest income would otherwise attract.
In practice, this removes the tax benefit of routing dividend or trust income through a minor’s name. The child still legally receives the income, but the tax bill is calculated as if it had gone to someone already in the top bracket, without the benefit of the graduated rates or personal credits that would normally soften tax on a small amount of income.
Why This Exists
Before these rules were introduced and later expanded, it was common for business owners to issue low-value shares to a spouse or children, then pay dividends disproportionate to what those family members actually contributed to the business. The tax on split income rules — together with older income-attribution rules that can attribute certain investment income earned on gifted funds back to the person who gave it — were built specifically to remove the incentive for that kind of arrangement.
Split Income vs. Ordinary Income: The Difference That Matters
| Ordinary income to a minor | "Split income" caught by the kiddie tax | |
|---|---|---|
| Example | A minor’s own part-time earnings or investment income from money they earned themselves | Dividends from a private family corporation; certain income allocated from a related trust or partnership |
| Tax rate applied | The minor’s own graduated rates, same as any taxpayer | The top personal marginal rate, regardless of the child’s other income |
| Personal credits available | Normal credits apply | Generally unavailable to offset the split income |
| Underlying concern | None — this is the child’s own economic activity | Income is being routed through the child rather than earned by them |
It Doesn’t Stop at Minors
A related and now broader set of rules extends a similar top-rate treatment to adult family members — spouses and adult children — who receive dividends or other split income from a related business but haven’t made a meaningful labour or capital contribution to it. The minor-child kiddie tax is the oldest and strictest version of this concept; the adult-family extension is more nuanced and has exceptions for family members who are genuinely active in the business. Because the exceptions are fact-specific, they need to be assessed on a case-by-case basis rather than assumed.
What Doesn’t Trigger the Kiddie Tax
Not everything paid to or earned by a minor is caught. Common examples that generally fall outside split-income treatment include:
- Employment income a minor genuinely earns for real work performed (subject to the same reasonableness scrutiny discussed elsewhere for family employment)
- Investment income earned on funds the minor obtained through means unrelated to the family business — for example, gifts from a grandparent, subject to separate attribution rules
- Capital gains on shares that don’t fall within the split-income definition (a narrower category than dividends, though it also has anti-avoidance rules of its own)
Because the boundaries between these categories are technical, don’t assume a payment is safe just because it isn’t a dividend.
What This Means for Family Business Planning
If minor children currently hold shares in a family corporation, or are beneficiaries of a family trust that could allocate business income to them, the presence of the kiddie tax doesn’t necessarily mean the structure is broken — but it does mean any dividend or income allocation to that child should be reviewed before it’s paid, not after. In many families, the more durable long-term strategy shifts toward structures like an estate freeze, which can lock in value for the next generation without relying on annual income splitting that the kiddie tax would simply tax away.
Frequently asked questions
Does the kiddie tax apply to RESP withdrawals or scholarships paid to my child?
No — the kiddie tax targets specific categories of split income like private-company dividends and certain trust or partnership allocations. RESP income and scholarships are taxed under entirely different rules and are not affected by this regime.
My child is 17 and about to turn 18 — does the kiddie tax stop automatically at 18?
The minor-child version of the rule generally stops applying once a child reaches adulthood, but a related set of rules can still apply to adult family members who receive split income from a related business without contributing meaningfully to it. Turning 18 doesn’t automatically make an income-splitting arrangement safe.
Can I avoid the kiddie tax by paying my child a wage instead of a dividend?
A wage is assessed under a completely different test — whether the amount is reasonable for real work performed — rather than the split-income rules. That doesn’t make a wage automatically safe; it just means a different set of rules applies, and each has its own risks if the arrangement isn’t genuine.
If the kiddie tax applies, does my child still have to file a tax return?
Generally yes. Income taxed under these rules is still the child’s income for filing purposes; the special rule affects the rate applied to it, not who reports it.
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