Help for families filing 2014 taxes

It’s tax time. Make sure your family takes advantage of recent changes to tax benefits, and avoids being subject to the evolving kiddie tax.

Family Tax Cut

The Family Tax Cut is a non-refundable tax credit for couples with minor children. The credit, worth up to $2,000, allows the higher-income spouse to transfer up to $50,000 of taxable income to the lower-income spouse.

Doug Carroll, vice president of tax and estate planning at Invesco Canada in Toronto, puts the Family Tax Cut in perspective. At the extremes, he says, $50,000 is transferred from the highest federal tax bracket (29%) to the lowest one (15%), a difference of 14%. That potential benefit is $7,000 ($50,000 × 14%), but the family can only save $2,000 in tax due to the cap.

As a result, says Carroll, the Family Tax Cut doesn’t allow for true income splitting. And, “if [spouses] are in the same bracket, it’s not going to make any difference; if they’re just one bracket apart, it may not make much difference.”

However, Peter Weissman, partner at Cadesky Tax in Toronto, notes that tax credits are applied directly against your tax bill, so the Family Tax Cut creates dollar-for-dollar savings. And claiming the benefit does not change your net or taxable income, so your GST/HST credit, Canada Child Tax Benefit (CCTB), age amount, spouse amount and other federal and provincial credits based on net income won’t change.

Only one spouse can claim the benefit; it cannot be shared. Complete Schedule 1-A, Family Tax Cut, and enter the amount on line 423 of Schedule 1. If you’re divorced, you and your former spouse can both claim the credit if you have joint custody, and you both have new, eligible spouses who themselves have not claimed the credit (see CRA’s website for complete details).

Children’s Fitness Tax Credit

The non-refundable Children’s Fitness Tax Credit (“Children’s fitness amount,” line 365 of Schedule 1) has increased to $1,000 per child (from $500 in 2013). For children eligible for the Disability Tax Credit, an increase of $500 is available if a minimum of $100 has been paid in fitness fees for 2014.

Weissman explains that tax credits, including the children’s fitness amount, are determined by multiplying the credit amount ($1,000 in this case) by the credit rate, which is 15% federally (and usually the lowest tax rate provincially. So that $1,000 credit works out to a federal tax credit of about $250, depending on the province.

To receive the credit, your child must be under 16 at the beginning of the year (18, if disabled), and fees must be paid for a program of physical activity.

Kiddie Tax

The kiddie tax (“Federal tax on split income,” line 424) is a tax, at the highest combined federal and provincial marginal rates, on split income. The definition of split income has changed for 2014, making it more difficult to reduce your tax by splitting income with children.

“This change eliminates an additional tax benefit that was available to upper-middle-class and higher-income earners,” says Weissman.

He explains that the kiddie tax was first introduced to prevent high-income earners from splitting dividend income with minor children (in 2000), and was then expanded to end splitting certain capital gains with minor children (in 2011). In this latest evolution, split income now includes business and rental income from partnerships or trusts paid to a minor child, particularly when the child’s relative actively participates in the earning of this income or has an interest in the partnership earning this income.

“In arm’s length situations,” says Weissman, “the kiddie tax wouldn’t apply. Generally, arm’s length means not related.” For example, if you buy a rental property as an income source for your minor child, you must hire an arm’s length third party to manage that property.

To calculate the tax, complete Form T1206, Tax on Split Income. Report the amount on your child’s tax return; your child can claim a deduction for the income (line 232).

Carroll notes that losses from business and rental income, as well as other employment expenses (line 229), are the focus of CRA’s 2014 audit letter campaign. The annual campaign focuses on a sample of taxpayers in a certain activity group, who may be “at risk of misunderstanding their tax obligations,” according to CRA’s website. These taxpayers received educational letters at the beginning of the year, letting them know that CRA will be looking at their types of claims.

Always keep your receipts in case CRA asks for them. “The chances of getting a letter asking for [receipts] are high,” says Weissman, adding that he commonly sees requests for child care expenses, among others. Occasionally, he even sees a request for fitness receipts.

Federal tax item	Changes for 2014	Eligibility
Family Tax Cut, line 423, a non-refundable tax credit worth up to $2,000	New benefit: Transfer up to $50,000 of taxable income to lower-income spouse	Couples with minor children; couples must not be living separate and apart at year-end and for 90 days or more because of relationship breakdown
Children’s fitness amount, line 365, a non-refundable tax credit (refundable for 2015)	Increased to $1,000 per child	Child is under 16 at start of year; fees paid are for a program of physical activity
Federal tax on split income, or kiddie tax, line 424	Expanded definition now includes business and rental income paid to minor child	Child with unearned business or rental income of more than $2,000, when child’s relative is involved in earning the income.

Tax credit: a reduction in tax owing. The taxpayer must have taxable income to use the credit. The size of the resulting credit does not depend on your tax bracket (it is calculated based on the lowest bracket). Most credits are non-refundable, meaning they cannot reduce your income below zero. Tax deduction: reduces the amount of your income subject to tax. The size of the resulting tax savings depends on your tax bracket.