CRA indicates that subjecting dividend income paid to a preferred beneficiary to TOSI accords with tax policy – but that it’s easy to avoid the designation

As noted re Q.13, CRA considers that the exclusion from para. (c) of the “split income” definition of amounts included in a preferred beneficiary’s income does not apply where a s. 104(19) designation is made respecting the preferred beneficiary income amount, so that the amount is included under subpara. (a)(i) of the split income definition. There is thus, in CRA’s view, the absence of a legislative exclusion from the tax on split income for such dividend amounts.

This seems anomalous and arguably is contrary to the Savage principle (that a specific exclusion implies the same exclusion from a more general charging provision). However, CRA noted that it has received confirmation in discussions with Finance that its interpretation accords with tax policy.

In order to avoid making the s. 104(19) designation when preparing a T3 slip, the amount should simply be included in Box 26 (“other income”).

Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.14 under s. 120.4(1) – split income – s. (a)(i).