CRA finds that income derived from a prior year’s sale of an excluded business is not excluded from the TOSI rules
Under the split-income rules, an “excluded amount” in s. (e)(ii) of the definition includes an amount “derived directly or indirectly from an excluded business of the individual for the year.”
CRA acknowledged that the “derived directly or indirectly” phrase was quite broad and adverted to the rule in s. 120.4(1.1)(d)(ii) that includes within that phrase an amount derived (in turn) from an amount that arose from the disposition of an excluded business. CRA nonetheless concluded that where Mr. X’s company (ABC Inc.), which had a (construction) excluded business and used the proceeds of sale of that business to establish an investments business in which Mr. X had no involvement, the dividends now paid to Mr. X out of the income of that business were not excluded amounts. CRA stated:
[T]o the extent that it could be determined that the amount in question was derived from the investment business carried on by ABC Inc., that amount could not constitute an "excluded amount" by virtue of subparagraph (e)(ii) of the definition … .
[I]t would not be possible to consider that an amount distributed by a corporation in a year subsequent to the disposal of the activities of the business is derived from that business for the year. … [S]ince the construction business was not carried on in the year in which the dividend was received by Mr. X, it could not qualify as an excluded business of Mr. X for the year.
Does CRA think that the s. 120.4(1.1)(d)(ii) exclusion only applies to income derived in the stub period immediately following, and in the year of, the sale?