CRA indicates that successive legatees can rely on the same activity-level of the original testator under s. 120.4(1.1)(b)(ii)

S. 120.4(1.1)(b)(ii) indicates inter alia that, for purposes of the (tax on split income) “excluded business" definition, where a legatee acquired property as a bequest (or under an intestacy) from a person who was actively engaged in the activities of a business throughout the five taxation years preceding the death, then the legatee is also deemed to have been actively engaged in the business throughout those five years. CRA indicated that this rule can apply iteratively to successive bequests.

For example, Opco shares, which were bequeathed by Mrs. A (who had been actively engaged for over five years in the Opco business) to Mr. A (who was passive) passed, in turn, on his death to his children. The factually passive children can also rely on s. 120.4(1.1)(b)(ii) in order to get the benefit of Mrs. A’s activity in the Opco business, so that any dividends arising on any of the shares of Opco owned by the children, for any taxation year starting with the year in which they inherited the Opco shares, would not be subject to the tax on split income.

Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.6(a) under s. 120.4(1.1)(b)(ii).