How to Prepare and File Your Child's First Income Tax Return

A child's First Income Tax Return is not due until the cessation of their activity. So far, so good, but what does this mean?

The definition of an "activity" is those activities that earn income (a business, employment, etc.). An example would be full-time employment (which can include volunteer work).

While parents may want to give some responsibility to children as early as age 12, once they turn 16 years of age, they are expected to make more of an effort with their finances, like collecting receipts and filing their taxes on time.

If children do not pay taxes on their activities, why does the Revenue Agency care whether or not they file a tax return? Two good reasons:

1. Parents may be claiming child benefits based on unverified income for their children (i.e., if deductions are claimed but no one reports any income).

2. There is always the possibility that individuals intentionally "forget" to declare income to avoid paying taxes altogether. One red flag for this would be very low reported incomes that do not seem to correspond with economic realities.

The CRA considers these factors when determining who they will investigate and what threshold they will use as grounds for doing so. They also look at trends among various age groups, areas where the average per capita income is lower than expected, or clusters of individuals without taxable incomes.

As a final warning to parents, beware of the following:

If a child is operating a business and declaring their profits as income (regardless if they're paying taxes) but the parents aren't reporting this at all on their tax return--this could trigger an audit because it would be considered tax evasion. The Revenue Agency takes these things very seriously and does not make exceptions for minors who commit such crimes. Parents can also go to jail for this! In addition to that, if a child has earned enough money outside employment or other activities that generated income that was not reported by their parent(s), it is a personal tax liability that cannot be transferred to the child.

For this reason, if you're going to allow your child to take on some responsibility for her finances, make sure she knows what responsibilities she has and will ultimately hold herself responsible for before moving forward. And as always, with such things, document everything so you have proof in case of an audit.

When Does Your Child Have to File a Tax Return?

Parents, do you know if your child must file a tax return? If your child has income like wages or self-employment earnings, she may need to file Form 1040. She may even need to file Form 1040A or Form 1040 EZ. Here's how to find out:

First step: Figure her expected gross income for the year by adding fewer expenses to her wages and any business income. Then follow these three steps:

Step 1: Did she earn more than the filing threshold for her age bracket? (If not, then stop - she doesn't have to file a return.) If yes, go on to 2.

Step 2: Does she have any unearned income (like interest, dividends, or capital gains)? For most people, this is not likely. If yes, go on to 3.

Step 3: Does she owe tax because of her job (working as an employee) or self-employment? If no, then stop - she doesn't need to file a return. If yes, we can tell you more about filing requirements and options for claiming tax and credits she may be eligible for!

Second step: Is she required to file Form 8615 with her return?

Form 8615 is used when the child has unearned income taxed at the parent's tax rate; some examples are interesting from investments like CDs and stock dividends. Some parents can simply add the child's income to their tax return so they can pay the appropriate amount of tax together (this is often called "included income"). Other parents may need to file a separate tax return for the child and only pay the additional taxes due on that return. Only if all of her unearned income was taxed at her parent's rates would she not need to file Form 8615; in this case, stop here and go to Step 3 below.

Third step: Is she required to file Form 8814 with her return?

Form 8814 is used when a parent can elect to report a child's income on their own tax return; some examples are interesting student loans or wages earned before age 18. Some parents can simply add the child's income to their tax return so they can pay the appropriate amount of tax together (this is often called "included income"). Other parents may need to file a separate tax return for the child and only pay the additional taxes due on that return.

For more information about filing requirements, visit our Filing Requirements for Dependents page. If you think your child should have filed a return but didn't - even though she had income - she should still file as soon as possible to avoid paying penalties.