CRA indicates that a s. 82(3) election can convert a TOSI dividend to a dividend on an excluded share
The s. 82(3) election allows a taxpayer (the higher income earner in a couple) to elect to have a taxable dividend from any taxable Canadian corporation received by the taxpayer’s spouse or common-law partner be deemed to be included in the taxpayer’s income, where such inclusion increases the taxpayer’s married or common-law partner credit under s. 118(1)(a).
In addressing the interaction between the s. 82(3) election and the tax on split income (“TOSI”) under s. 120.4, CRA indicated that the TOSI rules should apply based on dividends that in fact are received by the other spouse from the family corporation being treated as instead being received by the electing spouse, so that if the shares on which such dividends were actually paid were not excluded shares, but those of the electing spouse were, the TOSI rules would not apply to the dividends.
CRA is willing to reach this conclusion even though such dividends are not explicitly deemed to have been received on the excluded shares of the electing spouse. However, the two spouses cannot aggregate their positions to arrive at excluded share status (e.g., the recipient spouse and electing spouse each held 6% votes and value of the corporation). Also, of course, the CRA position produces an unfavourable result in the reverse situation of the recipient spouse holding excluded shares, and the shares of the electing spouse not being excluded shares.
CRA’s favourable view does not change if the s. 82(3) election is filed late.
Neal Armstrong. Summary of 23 August 2021 Internal T.I. 2020-0856081I7 under s. 82(3).