2019-0802331E5 TOSI and excluded shares

Principal Issues: 1. Whether capital gains are to be included in the determination of "income" for purposes of paragraph (c) of the "excluded shares" definition in subsection 120.4(1). 2. If capital gains are to be included, what would constitute a corporation's gross income with respect to those gains?

Position: 1. Taxable capital gains are to be included in determining the income of a corporation under paragraph (c) of the "excluded shares" definition. 2. Only the amount of a corporation's taxable capital gains for the year, without considering offsetting allowable capital losses, if any, is to be included.

Reasons: See below.

Author: Bilodeau, Patrick
Section: 120.4

XXXXXXXXXX                                                                                                                                                                  2019-080233                                                                                                                                                                                                                                    Patrick Bilodeau
May 24, 2019

Dear XXXXXXXXXX:

Re:  Clarification on position in technical interpretation 2018-0743961C6

This is in reply to your email of March 27, 2019, requesting clarification of the response provided to question 5 of the 2018 CRA Roundtable of the Society of Trust and Estate Practitioners (“2018 STEP Conference”).

In our response to that question, we clarified that the reference to “business income” in paragraph (a) of the definition of “excluded shares” in subsection 120.4(1) of the Income Tax Act (Canada) (the “Act”) is to the income of the corporation from a business and is to be distinguished from the word “income” included in paragraph (c) of the definition, which refers to the income of the corporation from all sources.  As well, those references to “business income” and “income” were clarified to generally mean the gross income of the corporation.

In light of the foregoing, you are seeking clarification with respect to the following:

1.    Whether capital gains are to be included in the determination of “income” for purposes of paragraph (c) of the “excluded shares” definition in subsection 120.4(1)?

2.    If capital gains are to be included, (i) what would constitute the amount of “gross income” in relation to a particular capital gain; and, more specifically, (ii) should the amount of the income from capital gains include allowable capital losses incurred during the relevant year?

Our comments

This response provides general comments about the provisions of the Act.  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70‑6R9, Advance Income Tax Rulings and Technical Interpretations.  All statutory references herein are to the provisions of the Act.

Response to question 1

As mentioned in our response to question 5 of the 2018 STEP Conference, reference to “income” under paragraph (c) of the definition of excluded shares in subsection 120.4(1) is to gross income, not net income or profit after expenses.  It should further be understood that for purposes of this paragraph, income refers to income generally, that is an amount that would come into income for taxation purposes.

The taxable portion of a capital gain from the disposition of property is generally included in the computation of a taxpayer’s income under the Act.  Consequently, taxable capital gains should be considered in determining whether, under paragraph (c) of the excluded shares definition in subsection 120.4(1), all or substantially all or the income of a corporation for the relevant taxation year is income that is not derived, directly or indirectly, from one or more other related businesses in respect of the specified individual other than a business of the corporation.

Response to question 2

For the reasons set out above, it is the amount of taxable capital gains from the disposition of property (as opposed to the amount of capital gains) that is to be included in determining the “gross income” of a corporation under paragraph (c) of the excluded shares definition in subsection 120.4(1).

Paragraph (b) of section 3 of the Act refers to, inter alia, the amount by which the total of a taxpayer’s taxable capital gains for the year exceeds the amount of allowable capital losses for the year.  In and of itself, this computation is akin to computing net gains (net income) from the disposition of property.  In keeping with the intent to consider a taxpayer’s gross income under paragraph (c) of the definition of “excluded shares”, we are of the view that only the amount of taxable capital gains (without any offsetting allowable capital losses for the year) should be included in determining if this condition will be satisfied.

We trust these comments will be of assistance to you.

Yours truly,

David Palamar
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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