Mr. and Mrs. Chen, both high-income earners, want to provide for their children's post-secondary education efficiently. They establish a family trust, with Mrs. Chen as the settlor, Mr. Chen as the trustee, and their two children as beneficiaries. The trust invests in growth stocks and distributes capital gains to the children. Which of the following statements about income attribution rules and this strategy is most accurate?

Question: Mr. and Mrs. Chen, both high-income earners, want to provide for their children's post-secondary education efficiently. They establish a family trust, with Mrs. Chen as the settlor, Mr. Chen as the trustee, and their two children as beneficiaries. The trust invests in growth stocks and distributes capital gains to the children. Which of the following statements about income attribution rules and this strategy is most accurate?

Answer options:

• Capital gains distributed to the children will be attributed back to Mrs. Chen due to the spousal attribution rule. ✅ Capital gains distributed to the children will be taxed in the children's hands, subject to the 'kiddie tax' if they are minors.
• Capital gains distributed to the children will be attributed back to Mr. Chen as the trustee.
• Capital gains distributed to the children will not be subject to attribution rules as capital gains are exempt from these rules.

Correct answer: Capital gains distributed to the children will be taxed in the children's hands, subject to the 'kiddie tax' if they are minors.

Explanation: Income splitting through a family trust is generally effective for capital gains. While interest and dividend income attributed to minor beneficiaries might be subject to the 'kiddie tax' (taxed at the top marginal rate), capital gains are generally excluded from this tax and would be taxed in the children's hands at their marginal rates.