Income Splitting and Anti-Avoidance Legislation: Evidence from the Canadian 'Kiddie Tax'

37 Pages Posted: 19 Sep 2014 Last revised: 8 Oct 2015

See all articles by Andrew M. Bauer

Andrew M. Bauer

University of Waterloo - School of Accounting and Finance

Alan Macnaughton

University of Waterloo - School of Accounting and Finance

Anindya Sen

University of Waterloo - Department of Economics

Date Written: October 20, 2014

Abstract

We examine whether “kiddie tax” legislation in Canada, effective as of 2000, deters income splitting between parents and minor children by taxing at the top marginal rate certain types of non-labour income received by children. OLS estimates based on cross-province and time-series data reveal that the share of dividend income reported by children aged 19 and under declines by 86% after the introduction of this anti-avoidance rule. The estimates also reveal that the share of capital gains (income not covered by the legislation) reported by minor children increases by 70% in the post-legislation period, suggesting that parents are switching to an alternative income splitting technique. However, the latter percentage effect is on a small base, and thus the decrease in dividend income is much larger than the increase in capital gains income. Hence, our analysis suggests that the “kiddie tax” is an effective method to deter income splitting.

Keywords: 'kiddie tax'; income shifting; income splitting; anti-avoidance; Canada

JEL Classification: D13; H24; H31; K34

Suggested Citation

Bauer, Andrew M. and Macnaughton, Alan and Sen, Anindya, Income Splitting and Anti-Avoidance Legislation: Evidence from the Canadian 'Kiddie Tax' (October 20, 2014). International Tax and Public Finance, Volume 22, Issue 6, pp. 909-931. Available at SSRN: https://ssrn.com/abstract=2497586 or http://dx.doi.org/10.2139/ssrn.2497586

Andrew M. Bauer (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

200 University Ave W
Waterloo, Ontario N2L 3G1
Canada

Alan Macnaughton

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada
613-996-8267 (Phone)
613-943-5597 (Fax)

Anindya Sen

University of Waterloo - Department of Economics ( email )

200 University Avenue W.
Waterloo, Ontario N2L 3G1
Canada
519.885.1211, ext. 2123 (Phone)
519.725.0530 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
123
Abstract Views
1,051
rank
227,653
PlumX Metrics