2022-0928251C6 STEP 2022 - Q8 - TOSI and multiple businesses

Principal Issues: Whether taxable dividends received by a husband and wife would be subject to TOSI where the husband and wife work on a full-time basis for various companies each of which has its own business and full-time staff, but less than 20 hours a week for any particular company?

Position: General comments provided.

Reasons: According to the law and previous positions.

Author: Do, Linda Chi Tuyet
Section: 120.4

2022 STEP CRA Roundtable – June 15, 2022

QUESTION 8. TOSI and Multiple Businesses

Suppose that husband and wife reside in Canada and own a number of corporations each of which has its own business and full-time staff. They work on a full-time basis for the various companies, but do not work for any particular company at least 20 hours a week. In this circumstance, would dividends above a reasonable amount be subject to tax on split income (“TOSI”)? Assume the shares of the corporations do not qualify as excluded shares.

CRA Response

For the purposes of our response, it is assumed that each of the businesses described above is a “related business” – as that term is defined in subsection 120.4(1) – in respect of both spouses.

Under the TOSI rules in section 120.4, 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).

Subparagraph (e)(ii) of the definition of “excluded amount” in subsection 120.4(1) provides that, in respect of an individual for a taxation year (if the individual has attained the age of 17 before the year), an amount that is derived directly or indirectly from an excluded business of the individual for the year is an excluded amount.

The definition of “excluded business” is 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 taxation year (footnote 1) ; or (b) any five prior taxation years of the specified individual.

Without limiting the generality of the “regular, continuous and substantial” test described above, 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.

With respect to the scenario provided in the question, since neither spouse works more than 20 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 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 in each business.

Whether an individual has been actively engaged in the activities of a business on a “regular, continuous and substantial basis” in a particular year will depend on the circumstances, including the nature of the individual’s involvement in the business (i.e., the work and energy that the individual devotes to the business) and the nature of the business itself. The more an individual is involved in the management and/or current activities of the business, the more likely it is that the individual will be considered to participate in the business on a regular, continuous and substantial basis. Likewise, the more an individual’s contributions are integral to the success of the business, the more substantial they would be. Therefore, such a determination will depend on the facts and circumstances specific to each particular situation.

We have not been provided with sufficient facts to determine whether each business would be considered an excluded business of each spouse for the year.

Finally, where none of the safe harbour exclusions apply, whether the TOSI should apply is generally determined on the basis of whether the amount received is a “reasonable return” according to the specific factors applicable in the circumstances, including the work performed, the property contributed in support of the business, the risks assumed by the specified individual or a related individual, prior amounts received by them in respect of the business, and any other factor as may be relevant.

Linda Do
2022-092825

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Except in respect of an amount described in paragraph (e) of the definition “split income”.

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