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How Your Children’s Income Affects Your Taxes

March 03, 2024
How Your Children’s Income Affects Your Taxes

Your 16-year-old teenager just got his first job; he worked all of summer 2022 and might still be working par-time during the school year. Now you’re wondering whether his income will have an impact on yours, and as a result, your taxes.

Often, parents believe that they have to add their children’s income to their own return, thereby increasing their tax contribution. Rest assured, this is not the case: your child’s income tax return and your own are two separate things.

This is good news for you! As a matter of fact, your child’s income is not added to your own. So, you can continue to receive family allowances for your underage child and the fact that your child received employment income will not reduce that amount. Furthermore, you will still be entitled to all of the same tax advantages , such as the following deductions or credits:

  • Tax credit for GST/QST;
  • Solidarity tax credit;
  • Medical expenses;
  • Caregiver amount, if one of your children is handicapped.

Taxes and single-parent families: The exception

There is a situation where your child’s income can affect what you owe to the tax authorities. A single parent with custody of the children may claim the eligible dependent tax credit. The base amount for the 2022 year is $14,398 and a percentage of that (15%) is awarded based on your income. If you have only one child and he or she earned $7,000 in the year, this amount will be subtracted from the basic amount, which will then be reduced to $7,398.

Note that the child must be a minor to be an eligible dependent. Therefore, if you have more than one child, the child who is a minor and earns little or no money will still be your best option for getting the maximum benefit from the eligible dependent tax Credit.

Here are a few things to remember about this tax credit:

  • It can only be requested for one dependent.
  • Only one parent can claim the tax credit for the same person.
  • The tax credit cannot be shared between separated parents. If a separated couple has one child, the tax credit could be claimed by each parent in alternate years. If one of these parents becomes a couple, he or she would no longer be entitled to receive the tax credit for his or her child since the eligible dependent now would be the spouse with the lower income.
  • The tax credit cannot be claimed for a child for whom a parent pays child support.

Tuition fees: The other exception

There is another situation that could cause you to lose a tax benefit when your child earns money: the transfer of tuition fees. A minor child in school, if his or her income is low, will not pay taxes and can transfer the tuition deduction to a parent. However, if the child earns more than $14,398, he or she will use the deduction.

Note that, for the tax authorities, a child’s annual income is not just employment income. If, for example, you have started a registered education savings plan (RESP), amounts withdrawn will be considered part of your child’s annual income.

Does your child have to file his/her own income tax return?

If your child’s income is only from a summer job, chances are he or she has not earned enough money to pay taxes. In fact, young people are generally exempt until they reach the $14,000 income threshold. If their income remains below that amount, they are theoretically exempt from reporting it to the tax authorities.

However, very often, their employer will have retained deductions at source and your child will have to file an income tax return if he or she want to recover the amounts overpaid.

On the other hand, there is an advantage to filing this tax return. It allows the young person to start accumulating his or her first RRSP contribution room, which could be useful for accumulating RRSP contribution. As the child’s income increases and the tax authorities claim their share, it would then be wise to maximize the RRSP contribution to reduce the tax payable.