Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Can an individual meet regular, continuous and substantial basis test in paragraph 120.4(1.1)(a) if they work a cumulative total of 20 hours a week in a group of related businesses?
Position: No. But depending on the facts each business may still be an excluded business of that individual under the more general test.
Reasons: See Below.
Author: Estabrooks, Karri Lea
Section: 120.4 (1), 120.4 (1.1)
2020 STEP CRA Roundtable – November 26, 2020
QUESTION 9. TOSI and Excluded Business
Suppose that a husband and wife own shares of a number of corporations each of which has its own business. Both spouses work on a fulltime basis for each of the various companies, but no particular company’s business requires more than 4 hours a week of work by either spouse on average. Assume that each spouse works at least 20 hours a week collectively in respect of all the corporations. In this circumstance, can the hours worked by each spouse in the businesses of these various corporations be added together for the purpose of applying the deeming rule in paragraph 120.4(1.1)(a) to the definition of excluded businesses?
One of the safe harbour exclusions from TOSI is for income received by a "specified individual" from an "excluded business". The definitions of specified individual and excluded business are set out in subsection 120.4(1). In general, a business is an excluded business of a specified individual for a taxation year if the specified individual is actively engaged on a regular, continuous and substantial basis in the activities of the business in either: (a) the relevant taxation year; or (b) any five prior taxation years of the specified individual.
Paragraph 120.4(1.1)(a) also sets out a bright line test whereby a specified individual will be deemed to be actively engaged on a regular, continuous and substantial basis in the activities of a particular business in a taxation year of the individual if that individual works in the business at least an average of 20 hours per week during the portion of the year in which the business operates. This test requires that it be applied on a business by business basis. Since neither spouse works more than 4 hours in any business carried on by any of the particular corporations they own, the requirements of the bright line test in paragraph 120.4(1.1)(a) would not be met and, as such, it remains a question of fact as to whether either spouse would otherwise be considered to be actively engaged on a regular, continuous and substantial basis in the activities of each such business on the basis of the limited number of hours worked.
The above scenario provides no rationale for why multiple corporations are being used by the spouses to carry on the various business activities or whether any other factors exist (such as additional labour) that may be necessary to operate each corporation’s business for a particular year. As such, it is not possible to conclusively determine whether, on the basis of an evaluation of such relevant factors, each spouse could otherwise be considered as being actively engaged on a regular, continuous and substantial basis in the activities of each of the businesses carried on by their various corporations for a particular taxation year.
However, the comments in our response to Question 3 at the 2019 STEP Conference (2019-0799901C6) and in Example 9 of our Guidance on the Application of the Split Income Rules for Adults provide useful general guidance on this issue. In particular, in the fact situation set out in Question 3 of the 2019 STEP Conference, we indicated that a husband and wife could both be considered to be actively engaged in the activities of a particular business carried on by their corporation on a regular, continuous and substantial basis for a particular year where the particular business did not require any other workers and only required them to spend on average 5 hours each per week in that business.
Karri Lea Estabrooks
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