CRA indicates that a passive real estate company would not generate TOSI to its equal significant shareholders

Many years ago, three Canadian-resident brothers pooled their savings and incorporated a corporation, whose only class of shares is owned equally by them and which owns three rental properties of equal value. The brothers live primarily on the dividend income on the shares and have never been active in the corporation, which instead is managed by an arm’s length property management company.

CRA indicated that, where the level of activity in the corporation was enough to constitute a business, and the other conditions in the excluded share definition were met, those shares would be excluded shares. Conversely, if it was determined that the corporation did not carry on a business, the excluded share exception would not apply – but s. (e)(i) of the excluded amount definition would apply to prevent the taxable dividend from being subject to TOSI.

The analysis would be similar following any split-up butterfly.

Neal Armstrong. Summary of 15 June 2021 STEP Roundtable, Q.4 under s.120.4(1) – excluded amount – s. (e)(i).