2020-0837641C6 2020 STEP Question 10 - TOSI - Excluded Business

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: Whether dividends would be exempt from split income where the corporation’s former business operations have ceased and it now only earns income from investment activities. The individuals were not subject to TOSI on dividends they received from the corporation when the former business was carried on due to the excluded business exception.

Position: Question of fact. However, if the corporation is considered to be carrying on an investment business that is a related business, if the conditions of excluded business are not satisfied with respect to that investment business then TOSI would apply unless another excluded amount exception applies.

Reasons: Legislation and previous positions.

Author: Estabrooks, Karri Lea

Section: 120.4 (1), 120.4 (1.1)

2020 STEP CRA Roundtable – November 26, 2020

QUESTION 10. TOSI and Change in Business

Suppose that husband and wife both worked in the business of a corporation for at least 20 hours a week for 5 years. At some future time, the assets of the business are sold, and the business ceases to be carried on in a particular year. The funds are invested producing investment income, and dividends are paid from this investment income in the following years. Assume the exception for “excluded shares” does not apply. In these circumstances, would the dividends be split income, because the definition of “excluded business” can no longer be met if the business has ceased?

CRA Response

Under the TOSI rules in section 120.4 of the Act, TOSI will apply to tax the “split income” of a “specified individual” at the highest marginal rate unless the amount is an “excluded amount” as these terms are defined in subsection 120.4(1).

In the above scenario, the corporation has sold the assets used in its previous business operations, which have completely ceased, and the proceeds from that sale have been reinvested (presumably along with the historical retained earnings) in various investments. However, while we have been asked to assume that the dividends paid by the corporation to the husband and wife would not be an excluded amount under the “excluded shares” definition as that term is also defined in subsection 120.4(1), no information has been provided on the following:

*    whether the corporation’s investment activities constitute a business;
*    if the corporation’s investment activities do constitute a new business, whether that business is a related business in respect of husband and wife (each being a specified individual); and/or
*    whether the husband and/or wife for a particular taxation year is actively engaged on a regular, continuous and substantial basis in the activities of that investment business.

The determination of whether any dividends paid by the corporation will be subject to TOSI can only be made following a complete review of all the relevant facts and circumstances. However, for some guidance on some of the above-noted informational issues please refer to our response to question 8 of the 2019 Canadian Tax Foundation Round Table (2019-0824411C6) and question 10 of the 2018 Canadian Tax Foundation Round Table (2018-0780081C6).

However, assuming the corporation is considered to be carrying on an investment business that is a related business then the excluded business exception would not apply to husband and/or wife if such individual is not considered to be actively engaged in that investment business on a regular, continuous and substantial basis either during the particular taxation year or in any five prior taxation years. Consequently, the taxable dividends will be split income subject to TOSI unless another excluded amount exception applies.

 

Karri Lea Estabrooks
2020-083764

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