CRA considers that “income” under the related business income test in (c) of “excluded shares” includes taxable capital gains without reduction for allowable capital losses
Para. (c) of the excluded share definition contains a requirement that all or substantially all of the income of the corporation for the most recent year is “income” that is not derived, directly or indirectly, from related businesses in respect of the specified individual (other than of the corporation itself). Although in 2018-0743961C6 indicated that that “income” in para. (c) refers to gross income, being generally that amount which would come into income for taxation purposes, CRA has now indicated that in the situation where the corporation has realized capital gains and capital losses in the year, the amount that goes into its “income” for para. (c) purposes is the amount of the taxable capital gains for the year without any deduction for allowable capital losses realized in the year.
Although CRA acknowledges that the amount that is included in income under s. 3(b) of the Act is the net taxable capital gains (i.e., as reduced by the allowable capital losses for the same year), CRA considers that looking only at the “gross” taxable capital gains for the year generally conforms with the 2018-0743961C6 approach.
Neal Armstrong. Summary of 4 May 2019 External T.I. 2019-0802331E5 under s. 120.4(1) – excluded share – para. (c).