CRA suggests a tracing approach for determining for TOSI purposes whether a dividend paid by Holdco to a child is derived from a related business or from Holdco’s stock portfolio

All the voting shares of Opco are held by Mr. X and all its participating shares are held by a family trust (“Trust”). In the prior year, Holdco, which is wholly-owned by Child X (age 35, who is not involved in the Opco business) generated $150,000 of passive income, and also received qua beneficiary a $100,000 distribution of a dividend that Trust had received from Opco. Could Holdco now pay a $75,000 dividend (the “Dividend”) on the basis that it was derived from income on the stock market investments rather than from Opco, so as to avoid the split income tax?

CRA concluded that “Holdco must adequately monitor its funds derived from stock market investments in order to determine whether those funds were used to pay the Dividend.” Split income tax would apply if the Dividend came “out of the funds from the $100,000 dividend received from Opco or from any dividends previously received from Opco.”

On the other hand “if it can be determined that Holdco will pay the Dividend to Child X out of its after-tax income from its stock market investments, then that dividend would be an excluded amount for Child X and would not be included in calculating the child’s split income.” There were two possibilities in this regard. First, the stock portfolio of Holdco might represent an investment “business,” in which case it would not be a “related business” because Mr. X (the father) was not involved in this business. Alternatively, if it was not a business, then it would again follow that it could not be a related business. Thus, either way, the stock portfolio would represent a good source for the Dividend that would not engage the tax on split income.

Neal Armstrong. Summary of 5 October 2018 APFF Roundtable, Q.11 under s. 120.4(1) – excluded amount – s. (e)(i).