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Who pays taxes on investment income when children invest? – The Globe and Mail

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An active crypto trader of any age can be deemed to be earning business income, whether they are over 18 or not.FG Trade/iStockPhoto / Getty Images

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To teach financial literacy, parents may encourage teens to try out investment trading with imaginary money in a practice account. But what are the tax implications when children graduate to trades that use real money?

When a child is under the age of 18, the answer depends on the source of the funds used to invest, says John Waters, vice-president, director of tax consulting services, at BMO Nesbitt Burns Inc. in Toronto.

Money that is the child’s – say, from a part-time job or an inheritance – can be invested and taxed in the child’s hands. However, if parents or other close relatives give money to the child to invest as a gift (or lend money at little to no interest), the attribution rules kick in and any interest or dividends are taxed in the giver’s hands.

“The idea is that you can’t split income generally by investing in your child’s name,” Mr. Waters says. “The one notable exception to that is capital gains. So, it’s possible to potentially invest on behalf of a child, earn capital gains, and have those gains attributable to the child who then pay taxes at their rate, which is often very low.”

When a child is over 18 years old, the attribution rules don’t apply to gifts of money – although they still apply to interest-free or low-interest loans if the purpose of the loan is to split income.

Setting minors up to invest

Minors aren’t generally allowed to open investment accounts in their own name, but there are workarounds with different tax consequences.

“A simple option, not ideal, is just to have the parent open up an account in the parent’s name,” Mr. Waters says. “In that scenario, of course, everything would be taxed in the parent’s hands.”

An alternative is to establish a formal trust for the child with the parents as trustees and the child as the beneficiary. In this case, the trust owns the assets, can invest them with (or without) the child’s input, and investment income is subject to tax within the trust, often at the highest marginal rates. When income is paid to the beneficiary, it’s taxable in the beneficiary’s hands.

Mr. Waters says that a trust’s complexity, including the requirement to file separate tax returns, makes this another less than ideal solution unless it’s set up to manage a larger inheritance.

“Probably the route that most people would go is an in-trust account or an informal trust,” he says. “Because it lacks the formal documentation to actually create a trust, there’s some question as to … what this is from a legal and, therefore, tax perspective. It’s a bit of a grey area.”

But the perspective that most people take is that the parent is an agent, acting on behalf of the child, and overseeing these funds for the benefit of that child, Mr. Waters adds.

However, if the informal trust is deemed to be a trust arrangement, it is subject to a further attribution rule. When the trustee also contributed the funds to the trust, all income – including capital gains – is attributed back to that trustee.

“Oftentimes, it makes sense to have, say, a grandparent make a gift and have the child’s parents be the trustee or agent controlling that account. Then, you bypass that,” Mr. Waters says. “But the concern would be if one or both of the parents makes that gift and then they are overseeing that account, you could have this additional attribution rule apply.”

Accurate recordkeeping is also essential to stay onside with the Canada Revenue Agency, and that may require parents to set up separate accounts for deposits to which the attribution rules apply.

Crypto trading adds another wrinkle

Teens may be especially attracted to the new kid on the block in investing: cryptocurrency. But trading in this space can introduce additional tax complications because cryptocurrency is treated as a commodity for the purposes of the Income Tax Act, says Vanessa Sarveswaran, vice-president, tax, retirement and estate planning, at CI Global Asset Management in Montreal.

“Any income from transactions involving cryptocurrency [can be] treated as business income or as capital gain, depending on the circumstances,” she says. “It’s the taxpayer’s responsibility to establish whether earnings from crypto are considered business income or capital gains.”

If the taxpayer holds the cryptocurrency for a long period of time, the sale of it is likely to be treated as a capital gain. In contrast, if the taxpayer trades cryptocurrencies actively, the sale of the asset is more likely to be treated as business income, she says.

While neither capital gains nor business income will be attributed back to parents, even if they provided the funds to trade (assuming that extra trust-focused attribution rule doesn’t apply), the distinction is important from a tax perspective because capital gains are taxed at a much lower rate than business income.

It also doesn’t matter whether a child is under or over 18. An active cryptocurrency trader of any age can be deemed to be earning business income.

As with other investment accounts, any interest or dividends earned in a cryptocurrency trading account set up for a minor but funded by a gift from parents will be attributed back to the parents.

Ms. Sarveswaran points out that not all cryptocurrency trading platforms provide tax slips, and some don’t even ask for a social insurance number. Therefore, it’s important for investors to track their transactions so they can report all taxable investment income on the appropriate tax return.

Beyond helping parents understand the tax issues related to teens and trading, advisors can encourage their clients to check in regularly on their children’s accounts, discuss the decisions they’ve been making, and ensure they can identify a scam, Ms. Sarveswaran adds.

“The kids should know the difference between reputable and untrustworthy sources before starting to trade on their own,” she emphasizes.

“Parents should also help children understand financial risk … meaning that crypto [and many other investments] can decline in value.”

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S&P/TSX composite down more than 200 points, U.S. stock markets also fall

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TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.

The S&P/TSX composite index was down 239.24 points at 22,749.04.

In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.

The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.

The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.

The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.

This report by The Canadian Press was first published Sept. 6, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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S&P/TSX composite up more than 150 points, U.S. stock markets also higher

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TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.

The S&P/TSX composite index was up 171.41 points at 23,298.39.

In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.

The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.

The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.

The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.

This report by The Canadian Press was first published Aug. 29, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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Investment

Crypto Market Bloodbath Amid Broader Economic Concerns

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The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.

The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.

Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.

The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.

Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.

Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.

Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.

Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.

The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.

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