Tax Primer 10 (click here to read it) discussed the
income tax attribution rules as they apply between spouses.
Separate attribution rules apply in respect of children
(including grandchildren and great-grandchildren) as well as nieces and
nephews, but only during the time that they are under 18 years of age. These “under-18” attribution rules apply only
in respect of investment income (such as interest and dividends). The rules do not apply in respect of capital
gains. For example, a grandparent might
gift money to a non-discretionary trust established for the benefit of a
grandchild who is under 18 years of age.
Any interest or dividend income earned by the trust will be taxed as if
it had been earned by the grandparent.
However, no attribution will apply in respect of capital gains. If the trust invests in a growth mutual fund
and realizes capital gains, the trust will pay the tax on the capital gain at
the child’s low rate of tax and not the grandparent’s higher rate.
Attribution rules in respect of under-18 year olds generally
cease in the year that the child, grandchild, great-grandchild, niece or nephew
turns 18. Attribution can continue to
apply, however, in respect of certain loan arrangements.
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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.