Personal Finance

Little known tax break if you have kids

  • Last Updated:
  • Apr 28th, 2008 7:40 pm
Tags:
None
[OP]
Sr. Member
User avatar
Sep 21, 2003
865 posts
48 upvotes

Little known tax break if you have kids

Here is a little known tax break if you have kids.

Put all the child tax credit money you get from the government in a separate account, called "Mothers name, in trust for the children". Obviously, use your own name. This creates an informal trust. Set up the bank account and tell the govt. to put all those funds there. Make sure that no other money goes there just child tax credits. We put in the Family Allowance cheques.

Now, here is the interesting thing. The interest that money earns is taxed in the kids hands, not the parents.

This is not well known.

You have to get a SIN number for each kid, and make out a tax return each year with his or her share of the interest earned from the T5. Put in a note giving details of the account so Ottawa can make sense of it. Obviously the kid won't need to actually pay any tax because he won't be earning enough so the interest never gets taxed and essentially grows tax free even though it is after tax money.

Then, on the mother's tax return, include a note explaining what you have done so Ottawa knows not to include the interest income on that account.

We have done this for 18 years for 3 kids and the account has grown to over $20k so there is enough interest generated to incur some taxes if the mom had to declare it.

In some ways this has been better than the RESP, because the kids can use the money for whatever they want. Also, all the money has already been taxed, where in a RESP, the interest is taxed in the kids hands when it is withdrawn, and many kids will already have jobs at that age so they may end up paying taxes on the money they withdraw. One reason that you should use up the RESP money for the first few years of college when the kids are earning less.

We set up a little mutual fund and transferred the money every year, and it grew quite nicely and now each kid has a bit of capital for his own use and it is all after tax money, even though no taxes have ever been paid on it.

You do have to be careful and not put in any extra money, because the interest on gifts is taxed in the hands of the giver. We just set up the account and forgot about it. The govt. put in the money every month and every year or so we would move it to someplace a bit more profitable.

One more thing, the computer tax programs usually allow an unlimited number of returns for people earning a low income so making out the kids returns won't affect the number of returns you can do. You have to mail them in though, including the mother's, so you can include the notes explaining things. No internet filing. I tried net filing once and got disallowed, so I had to re-submit including all the notes to get it changed.
24 replies
Deal Fanatic
Jan 16, 2003
6244 posts
93 upvotes
Does it apply to other things than the family allowance cheques? They say I earn too much to receive that.. > :(
Deal Fanatic
Feb 1, 2006
9574 posts
742 upvotes
Muskoka
'family allowance'...wow, you guys are dating yourselves using that term! :-0 Baby bonus was the other term used, I think, back in the old days.

For anyone who's confused by it, the OP is referring to the Child Tax Benefit. And yes, if you have a high household income (I think the cut off is $90K or so), you don't get it. Even if you do get it, it's reduced the closer you are to the cut off, so unless you are low income, or have multiple kids, it's just a pittance, really. I think we got $12/month one year, and only because we made large RRSP contributions to lower our taxable income.
Deal Addict
Apr 28, 2004
1794 posts
320 upvotes
jande9 wrote: Here is a little known tax break if you have kids.

Put all the child tax credit money you get from the government in a separate account, called "Mothers name, in trust for the children". Obviously, use your own name. This creates an informal trust. Set up the bank account and tell the govt. to put all those funds there. Make sure that no other money goes there just child tax credits. We put in the Family Allowance cheques.

Now, here is the interesting thing. The interest that money earns is taxed in the kids hands, not the parents.

This is not well known.
A couple of issues:

1. The "in trust" bank account you created does not attribute the income to the children. You can name your account whatever you want, but I believe (at least with my bank) you are still the sole legal owner of the account. You can set up a full joint account with the child, however, most of the interest income will still be attributed back to you (as explained later.)

Or you can set up a youth account where the child is sole owner, but you can't deposit your cheques into it - just cash or cheques in the child's name only. Plus the child could make a withdrawal from the account at any time and spend it all if they wanted to. Not sure I want that to happen.

Basically, for it to be considered taxable in the child's hands, you can't have any control of the assets (spending or investing).

2. The Family Allowance (CCTB) cheques are paid to the parents/guardians, not the children. Wherever you deposit it, the interest income falls into your income taxes. Even with a joint account with the child, the assets was funded with your money, hence, most of the interest must be attributed back to you. You can't split the reporting of income just to favour the lower tax bracket account holder.

While the CRA may not bother to go after so small an amount, this is unfortunately not a "little known tax break."
Deal Fanatic
User avatar
Oct 10, 2006
7741 posts
82 upvotes
Toronto
Great Info OP!!! Thank you!
mart242 wrote: Does it apply to other things than the family allowance cheques? They say I earn too much to receive that.. > :(
Actually ALL children under 6 now receive Harper's Hundred monthly as a Daycare relief.
he Universal Child Care Benefit is a new initiative designed to assist Canadian families, as they seek to balance work and family life, by supporting their child care choices through direct financial support. The UCCB payment is to be paid on behalf of children under the age of 6 years in instalments of $100 per month per child.
http://www.cra-arc.gc.ca/benefits/uccb/menu-e.html
See this button :confused: :confused: Learn how to use it PLEASE ;)
Deal Fanatic
Feb 1, 2006
9574 posts
742 upvotes
Muskoka
3weddings wrote: Actually ALL children under 6 now receive Harper's Hundred monthly as a Daycare relief.
Not a hundred, though! They axed the CTB under six supplement of $20/month when they brought it in, so it's really only $80. The $100 is also added to your taxable income at year end, so if you're in a 30% tax bracket, that $100 is really only $50.

$100 sure makes a catchy number for political points, though, don't it? ;)
Sr. Member
Jan 17, 2002
679 posts
22 upvotes
I was inquiring about a similar subject in a previous post and someone posted this information for me.

How is an in-trust account taxed?
Briefly, the rules are:

* All income (interest, dividends, foreign and other income) is attributed to the contributor if it was earned during a year in which the contributor was resident in Canada. The contributor must include this amount in his or her income and pay the related taxes

* If funds are provided solely from child tax benefit payments or an inheritance, the income is taxed in the hands of the child

* All capital gains on the account, whether from distributions from a mutual fund or sale of any assets in the account, may be taxed in the hands of the child

* The trustee is responsible for providing documentation of the source of the funds in an in-trust account and for ensuring appropriate income tax treatment. See your Financial Advisor for more tax details, or ask for our taxation bulletin on in-trust accounts.

http://www.aimtrimark.com/AIM/Retail/In ... ust_qu.cfm
Deal Fanatic
User avatar
Oct 10, 2006
7741 posts
82 upvotes
Toronto
Bullseye wrote: $100 sure makes a catchy number for political points, though, don't it? ;)
I couldn't agree MORE!! They get us one way or another.

I have yet to complete the application since we have never qualified for CTB and I only have the one left under six...is it really worth it?
See this button :confused: :confused: Learn how to use it PLEASE ;)
Deal Fanatic
Feb 1, 2006
9574 posts
742 upvotes
Muskoka
3weddings wrote: I couldn't agree MORE!! They get us one way or another.

I have yet to complete the application since we have never qualified for CTB and I only have the one left under six...is it really worth it?
Of course! Something is better than nothing, right?
[OP]
Sr. Member
User avatar
Sep 21, 2003
865 posts
48 upvotes
akira1971 wrote: A couple of issues:

1. The "in trust" bank account you created does not attribute the income to the children. You can name your account whatever you want, but I believe (at least with my bank) you are still the sole legal owner of the account. You can set up a full joint account with the child, however, most of the interest income will still be attributed back to you (as explained later.)

Or you can set up a youth account where the child is sole owner, but you can't deposit your cheques into it - just cash or cheques in the child's name only. Plus the child could make a withdrawal from the account at any time and spend it all if they wanted to. Not sure I want that to happen.

Basically, for it to be considered taxable in the child's hands, you can't have any control of the assets (spending or investing).

2. The Family Allowance (CCTB) cheques are paid to the parents/guardians, not the children. Wherever you deposit it, the interest income falls into your income taxes. Even with a joint account with the child, the assets was funded with your money, hence, most of the interest must be attributed back to you. You can't split the reporting of income just to favour the lower tax bracket account holder.

While the CRA may not bother to go after so small an amount, this is unfortunately not a "little known tax break."

You are correct in all of your points except the last one. This is indeed a tax break. It is not that they are not bothering over a small amount. They make a special exception to all the above rules for these funds. If all the money in the account is from the Child Tax benefits, and there is no other money in that account, they will allow you to attribute the interest income to your children.

We only set up the informal trust so we could keep better track of what the account was for. The tax break did not depend on setting up the informal trust. The cheques are made out to my wife and are deposited in the account that has her name on it, as well as the kids. She gets the T5 tax slip, but we don't enter the money earned on her return. We do include the slip of paper along with the explanation. We have been doing this for 20 years.

Last year we had over $600. in interest earned in that account, and it was all claimed on the kids returns, and all accepted. Like I said, when we didn't include the explanatory notes they rejected the claim, but they reversed their assessment when we sent in the notes.
[OP]
Sr. Member
User avatar
Sep 21, 2003
865 posts
48 upvotes
I don't mean to flog a dead horse here but I finally found the relevant info on the CCRA site.

You have to report any interest on money you invested in your child's name unless you deposited Canada Child Tax Benefit payments into his or her bank account or trust. That interest is your child's income.

This is from the page here.

I made one account in trust for my three kids and it has over $20k in it now, all accumulated from the family allowance and child tax benefits. (The oldest is 21 so we have been collecting a long time) We have been reporting the interest on their income tax forms every year since they have been born, and they have not had to pay any tax, because their income has been either non existant or too low.

One other thing. I have heard that parents have learned about this when the kids were a bit older, so they went back through all their files, figured out what they have received through the child tax benefit, and made a lump sum deposit to their kids account for that amount.
[OP]
Sr. Member
User avatar
Sep 21, 2003
865 posts
48 upvotes
We just collapsed the account holding the accumulated Child Tax Benefits because our youngest turned 18, and distributed the money to the kids. It worked out to just over $11k each. Remember this is all after tax money, with the interest duly reported every year on the kids tax returns, but of course they never actually needed to pay tax on it because it was below their personal limit.

So accumulating the CTB in your childs name should get him or her an over $10k nest egg when they turn 18, assuming the parents only make a moderate income.
_________________________________________
Banned
Jun 19, 2006
9349 posts
53 upvotes
....Or you could just buy the kid BRKA (or BRKB if you're poor) shares, that never pay a dividend, and not a dime of 'income' will be attributed back to you.

It is ludicrous, though, that Canadian minors do not have property rights. How are we supposed to encourage a culture of savings and investing if the government reaches into kids' bank accounts and taxes them at the full marginal rates?
Sr. Member
User avatar
Oct 15, 2001
944 posts
34 upvotes
Can I deposit both the Universal Child Care Benefit $100 and the Canada Child Tax Benefit (CCTB) to the "trust account",
or only the CCTB?
Sr. Member
Aug 1, 2006
952 posts
63 upvotes
Yes, you can.

Also, it's not really necessary to be an in-trust (informal trust) account. Outlook financial, for example, is among the very few institutions allowing you to set-up a savings account in your child's name. Your child would be the primary account holder (so all the tax slips received for investment income is reported by Outlook under his SIN) and you would be the joint holder.

I remember that I was looking very hard in the past for institutions like this one - sent a bunch of e-mails to each known bank and "virtual" bank. No one, except Outlook, was capable of doing this. All the others were telling me crap/changed the subject - like RESPs or in-trust accounts (because they did not understand IN FACT the issue). From this point of view, yes, I aggree with the name that this thread has. It's a little known tax break.

Please remember - Since it's the child's money, it really makes a disadvantage to invest it under in-trust or resp.

After I let the money accumulate a bit inside Outlook, I then transfer it to a brokerage account where I have an in-trust account open. Since the kids don't have the right to sign legal contracts, they cannot be (unfortunately) primary account holders in mutual fund-based accounts or brokerage account. BUT, this is not a real problem- as long as you take care to never put other money in that in-trust account than what the kid receives from government. You will simply ignore all the tax slips coming from that brokerage account - even if they will be under your SIN, all the investment income (dividends and/or ordinary interest) will in fact belong to your child. That's why, in this context, the in-trust is not really an in-trust, it's just a "technicality".

Also, for all the other money you'd like to put yourself to your kid, it's advisable to open a second in-trust account. Or/And a RESP, if you are ok with the registered savings idea.

And, finally, please do not forget that in any scenario - the investment income of capital gains type is never attributtable to the contributor but to the beneficiary. It's a concept that CRA calls it "crystallization".

Top

Thread Information

There is currently 1 user viewing this thread. (0 members and 1 guest)