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FAMILY BUSINESS
Financial Planning for Children
Effective financial planning not only involves the primary income earners; it also includes the children in a family. Planning that includes children not only can reduce the overall family tax burden but can improve the future quality of life for the children. Whether their future brings education, business start up, travel or home purchase, their choices will be largely dependent on their financial resources. As parents we can have a significant influence on those choices by following a solid financial plan beginning at an early stage. We have several ideas, which will help our clients along.
Payment for Work Done The vast majority of our clients own their own businesses. Once the children are old enough to provide services to the business, they should be placed on the payroll. Children can be paid for a variety of work such as cleaning business premises, washing vehicles, filing, lawn maintenance at business premises, farm chores, etceteras. The wages paid to the children must be reasonable in relation to the services provided.
Children under 16 years of age are not subject to Canada Pension Plan. They can earn up to approximately $7,700 annually (from all sources) and pay no tax. Although income earned above this amount is taxed at regular marginal rates, it is likely to be lower than the parents’ rate of tax.
The money earned can be held in trust by the parents and handled as they see fit. It can be paid to the children for their use. It can be used to buy clothing and other necessities. It can be invested and accumulated for future use. The key is, it has born little or no tax. For wages paid up to $7,700, the tax saving to a family whose primary income earners are in the top marginal rate bracket is approximately $3,570 per child.
RRSP Contribution Entitlement Children who have employment earnings should file an income tax return regardless of whether they are taxable or not. RRSP contribution entitlement may be carried forward indefinitely. Your child will build his entitlement by 18% of each year’s employment income. The entitlements will be available for his future use. It may be beneficial to have your children file returns back to 1991 to establish RRSP entitlements for those years.
Child Tax Benefits Child Tax Benefits received by parents can be invested in the childrens’ names. The income earned on these invested funds will be taxed in the childrens’ hands. Any investments by minor children will need to be held by the parents’ “in trust” due to laws that deal with the enforceability of contracts with minors.
Invest for Capital Gains Interest and dividend income earned from monies gifted to a minor child from parents or grandparents will attribute back to the giftor and be taxed in their hands. Monies gifted to minor children should be invested in securities that will bare only capital gains such as aggressive growth mutual funds or shares of growth oriented companies. Capital gains do not attribute back to the giftor. They are taxed in the hands of the minor child.
Child Care Expenses A child over 18 years of age can be paid for day care services for looking after their siblings under the age of 18 years. Provided the child care services enable the lower income spouse to earn employment or self-employed income, the payments will be deductible from that spouse’s income as child care expenses. The recipient child must declare the income for tax purposes.
We are available to assist you with this type of financial planning should you feel it is appropriate in your particular circumstances.
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