David, a 60-year-old high-income earner, transferred $500,000 to an investment account in his 20-year-old son's name, hoping to split investment income. The son subsequently earns $20,000 in interest income and $15,000 in eligible dividends from this account. In the absence of an exception, how will this income be taxed?

Question: David, a 60-year-old high-income earner, transferred $500,000 to an investment account in his 20-year-old son's name, hoping to split investment income. The son subsequently earns $20,000 in interest income and $15,000 in eligible dividends from this account. In the absence of an exception, how will this income be taxed?

Answer options:

• All $35,000 will be taxed in the son's hands. ✅ The $20,000 interest income will be attributed back to David, while the $15,000 dividends will be taxed in the son's hands.
• The $15,000 dividends will be attributed back to David, while the $20,000 interest income will be taxed in the son's hands.
• All $35,000 will be attributed back to David.

Correct answer: The $20,000 interest income will be attributed back to David, while the $15,000 dividends will be taxed in the son's hands.

Explanation: Under Canadian tax attribution rules, interest income from a gift or loan to a non-arm's length individual under age 18 is attributed back to the donor. However, if the recipient is 18 or older, general attribution rules for interest and capital gains apply, but the attribution of eligible dividends only applies if the recipient is a 'specified individual' and the income is 'split income' under TOSI rules. Since the son is 20, interest income is attributed back, while eligible dividends are not typically subject to the general attribution rules for income splitting between adults for non-specified income, though TOSI may apply if the son is a 'specified individual'. Given the age, the interest income is attributed under ITA 74.1(1), but the dividends would generally not be attributed under this provision.