CRA discusses the “derivation” for TOSI purposes of dividends from previously earned income from a related business
CRA provided two contrasting examples illustrating the timing of the related business determination for split-income purposes. In the first example, Mr. and Mrs. A (both over 25) are equal shareholders of ACo, which two years previously sold the “Old Business” in which Mrs. A had been actively engaged on a regular, continuous and substantial basis for many years – but Mr. A, not at all. Since then, ACo’s sole activity has been the investing of the proceeds.
After noting that if ACo’s current investment activities constituted a business, the excluded share exclusion from the split income (TOSI) rules would apply, CRA went on to indicate that if ACo’s investment activities did not constitute a business, a dividend declared in the current year to Mr. and Mrs. A would be considered to be excluded amount, given the winding up of the Old Business in a previous taxation year and there being no other related business of ACo.
In another scenario, Mrs. and Mr. A instead are the respective sole shareholders of Opco (carrying on a non-services operating business) and Serviceco (earning income in Year 1 from Opco, but without Mr. A being actively involved in its business). In Year 2, Serviceco does not render any services and its activities are insufficient to constitute a business. CRA indicated that, as Serviceco earned its Year 1 income from the provision of services to Opco (i.e., derived amounts from Opco’s business) and the dividend paid in Year 2 can also be said to have derived directly or indirectly from the provision of services to Opco in Year 1 (and thus to be derived directly or indirectly from Opco’s business, being a related business), the Year 2 dividends paid by Serviceco of its after-tax income from Year 1 would not be excluded amounts.