CRA notes that two years were required to pass before proceeds from the sale of a related business could generate excluded share income for TOSI purposes
In Year X3, Investco sells all the shares of Opco, which was the only related business respecting the specified individual (Investco’s shareholder) and uses the proceeds in an investments business. CRA indicated that dividends paid by Investco to the individual shareholder cannot qualify for the excluded share (“tax on split income” or TOSI) exception until Year X5. For instance, in Year X4, the income of Investco was tainted because in its last taxation year (X3) it had received dividend income from Opco and, in any event, the taxable capital gain realized by it in that year was deemed by s. 120.4(1.1)(d)(i)(B) to be income derived from the Opco business.
Neal Armstrong. Summary of 12 June 2019 External T.I. 2019-0792011E5 F under s. 120.4(1) – excluded share – (c).