2019-0824421C6 2019 CTF-Q9-Excluded Amount-Non-related Business exception

Principal Issues: Application of the excluded amount exception in the context of the sale of a business.

Position: General comments provided.

Reasons: See comments.

Author: Witteveen, Tobias
Section: 120.4

2019 CTF Annual Conference

CRA Roundtable

Question 9: TOSI – Excluded Amount and the Non-Related Business Exception

For individuals age eighteen or over, income which is not derived directly or indirectly from a related business in respect of the individual is an “excluded amount” (subparagraph (e)(i) of the definition of that term in subsection 120.4(1)). Where a specified individual (the “Individual”) receives a dividend from a corporation (the “Corporation”) which, in the past, carried on a related business, but did not do so during the year, would the dividend be an “excluded amount” under this provision in the following situations?

A.    The business ceased in a prior year, and is no longer operated by anyone.

B.    The business was sold to an unrelated corporation in a prior year and is still active, but no source individual in respect of the dividend recipient was active in the business in the year of the dividend.

C.    The business was sold to an unrelated corporation in a prior year and is still active, but a source individual in respect of the dividend recipient was active in the business in the year of the dividend (for example, a former owner related to the Individual is employed by the new owners in the business, perhaps for a transitional period).

Assume in all three situations:

•     the corporate income that supports the dividend is derived, directly or indirectly, from the related business carried on by the Corporation in the past; and
•     the Corporation did not derive, directly or indirectly, income from a related business in respect of the Individual other than the related business carried on in the past.

CRA Response (A)

Consistent with the CRA’s response to Question 9 at the Round Table of the 2018 CTF annual conference (“Question 9”), generally, yes.

As discussed in our response to Question 9 the expression “derived directly or indirectly from a business” has a broad meaning. However, in the circumstances discussed, the dividend will not be considered to have been derived from a related business for the year because the business was not carried on in the particular year.

As a result, the dividend received by the Individual would accordingly constitute an “excluded amount”.

CRA Response (B)

Consistent with the response to question (A), generally, yes.

As was the case in question (A), it is our view that the dividend received by the Individual would be considered to be derived directly or indirectly from a related business, being the related business carried on in the past.

However, similar to question (A) we are also of the view that in circumstances where the business was sold to an unrelated corporation in a prior year and is still carried on, but no source individual in respect of the dividend recipient was active in the business in the year of the dividend, then a dividend received by the Individual in that subsequent year will not be considered to have been derived from a related business for the year because the related business was not carried on in the particular year.

As a result, the dividend received by the Individual would accordingly constitute an “excluded amount”. This response assumes that the source individual no longer retains any ownership of the business. If that is not the case, paragraph (c) of the definition of “related business” may be applicable and could result in the application of the tax on split income.

CRA Response (C)

Based on the information provided, generally, no.

It is our view that the dividend received by the Individual would be considered to be derived directly or indirectly from a related business. In the circumstances provided, where the business was sold to an unrelated corporation in a prior year and is still carried on, and a source individual was active in the business in the year of the dividend, the business carried on by the unrelated corporation may constitute a related business for the year. Pursuant to subparagraph (a)(ii) of the definition of “related business” in subsection 120.4(1), if the source individual is considered to be actively engaged on a regular basis in the activities of the unrelated corporation related to earning income from the business, then the business that continues to be carried on by the unrelated corporation would qualify as a related business for the year.

Therefore, in the circumstances described, the dividend paid by the Corporation will not meet the requirements to be considered an “excluded amount” under subparagraph (e)(i). The business carried on by the unrelated corporation will constitute a related business until the source individual is no longer actively engaged on a regular basis in the activities of the unrelated corporation.

Notwithstanding the above, it should be noted that depending on the facts and circumstances of the Individual, another exception from the tax on split income may apply.

T. Witteveen
2019-082442
December 3, 2019

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