CRA indicates that shares of a portfolio investment company potentially may qualify as excluded shares for TOSI purposes

2018 STEP Roundtable Q.7 indicated that the shares of a holding company (or of a company generating no business income) cannot qualify as excluded shares for purposes of the split income rules. CRA noted that if the company instead has “a business whose principal purpose is to derive income from property, including interest, dividends, rents and royalties, such as investment management corporations” then “the condition in subparagraph (a)(i) of the definition of “excluded shares" in subsection 120.4(1) would be satisfied.”

For example, suppose that:

• Mr. and Mrs. X (both age 35) respectively hold 90% and 10% of the voting common shares of Holdco
• Holdco holds all the shares of Opco in whose business Mrs. X has no involvement
• Holdco in its preceding year did not receive any dividends from Opco and it holds passive investments (acquired some time ago out of dividends received from Opco) which, in the previous year, generated interest and dividends of $100,000,
• Holdco now pays a dividend (representing much of the previously received income) pro rata to Mr. and Mrs. X.

CRA considers that her shares are “excluded shares” if such $100,000 of income was “derived from the carrying on of a business the purpose of which is to earn interest income and dividends … notwithstanding the fact that the capital used in the acquisition by Holdco of the property used in carrying on its business was derived from dividends received from Opco.” As the dividend received by her would constitute an "excluded amount" per s. (g)(i) of the definition thereof, she would not be subject to the split income tax thereon.

Maybe it was a good idea after all for your family holding company to have accumulated a lot of portfolio investments.

Neal Armstrong. Summary of 5 October 2018 APFF Roundtable, Q.9 under s. 120.4(1) - excluded shares - (a)(i).