Should You Have Minor Children as Shareholders of Your Family Business?

September 27, 2011

Should You Have Minor Children as Shareholders of Your Family Business?

2 Minute Read

This post was contributed by Darren Swann, a Senior Manager with MNP's Tax practice in Drumheller, AB
Prior to 2000, a common income splitting strategy was to have minor children as shareholders in the family business - either directly or indirectly through the use of a family trusts. The parent’s corporation would then pay dividends to the minor children to take advantage of the fact that the child was in the lowest tax bracket. In some provinces, a child could receive as much as $30,000 of dividends per year without incurring any personal income tax.

"Kiddie Tax" Legislation

On January 1, 2000, Parliament implemented legislation to prevent income splitting techniques to minor children, often referred to as “kiddie tax”. The “kiddie tax” applies on certain types of income received (“split income”) by a child under the age of 18. The types of income subject to kiddie tax included dividends from private corporations, shareholder loan benefits, and certain types of management services structures.

If a minor child does receive split income, they will be subject to the highest marginal tax rate in their respective province of residence. In addition, the child will not be entitled to use any personal exemption amounts to offset the taxes (i.e. Basic personal amount). The only relief on income subject to kiddie tax is the dividend tax credit and the foreign tax credit.

For example, if a minor child resident in Alberta receives a $10,000 dividend from the family corporation, they would pay $2,771 of kiddie tax on that dividend, even if they have no other sources of income. This is exactly the same rate of tax that their parents would pay on the same $10,000 dividend, assuming that they are in the highest tax bracket.

The Income Tax Act legislates that parents are jointly and severally liable for their child’s “kiddie taxes”. This gives the Canada Revenue Agency more power to collect on tax debts owed by the children.

Impact on Capital Gains

Prior to the 2011 budget, taxable capital gains earned by a minor child was not subject to kiddie tax. As a result, there were many different planning ideas that triggered capital gains for the minor child by arranging for the child or a trust to sell shares of a private corporation to a parent or other related party. In the 2011 budget, the Federal government implemented further measures to apply kiddie tax to capital gains derived from the sale of private corporation shares to a person that does not deal at arm’s length with the child. Any such capital gains will be reclassified as a taxable dividend received by the minor and it will be subject to kiddie tax at the dividend tax rate.

The kiddie tax will not apply to capital gains realized by minor children from sale of publically traded stocks or on gains realized from the sale of private corporation shares to an arm’s length person.

Questions to Ask

Consideration should always be given to the legal consequences of issuing shares to children of any age. Some questions that you need to ask your legal and business advisor are as follows:

  • What are the legal rights of a shareholder?
  • Will the shares be voting or non-voting?
  • Will the children participating in the growth of the company?
  • If the business is sold, what is the child’s entitlement to the proceeds?
  • When the children grow older, what happens if the child marries and subsequently divorces?
  • Will the child be active in the family business? What implication is there if the child does not participate in the business?

The kiddie tax legislation certainly dissuades parents from issuing shares to minor children. It may be better to explore other options such as paying a reasonable wage to a child that works in your family business. To learn about the tax planning options available to you and your family, please contact your local MNP Tax advisor.


  • Stack of brand new tractor tires

    July 30, 2021

    New tax incentive on equipment purchase provides immediate benefit

    Federal Budget 2021 provides an upfront tax incentive for Canadian-controlled private corporations (CCPC) to undertake significant capital asset puchases. It does so by allowing for the immediate deduction of up to $1.5 million of certain depreciable property purchased from arm’s-length parties between April 19, 2021, and January 1, 2024.

  • Confidence
    Holding a portfolio on one hand, comparing data on another

    July 28, 2021

    How to optimize value from an Internal Audit co-sourcing partnership

    Co-sourcing your internal audit function can help you navigate several contemporary challenges — including the need for greater agility and subject matter expertise, as well as cost and resourcing pressures. Here we investigate practical steps to find the right vendor and make this relationship as seamless, targeted, and cost effective as possible.

  • Progress
    person reviewing graphs on their phone

    July 26, 2021

    Automating finance, so you can focus on your business

    Cloud accounting and bookkeeping solutions allow you to focus on the critical parts of your business instead of shuffling through paperwork every week.