CRA indicates that a capital dividend from a related business was not a source of arm’s length capital under the TOSI rules

Paragraph (a) of the “arm’s length capital” definition in respect of a specified individual excludes “income” derived directly or indirectly from a related business in respect of the individual. This means that a capital dividend so derived from the related business is not excluded, so that the specified individual who is between 17 and 23 years can invest that capital dividend without being subject to tax on split income (TOSI), correct?

CRA indicated that a capital dividend paid by Opco to a family trust, which in turn allocated and distributed it to a child beneficiary aged 20, would come within the exclusion in para. (c), which adverts to property transferred directly or indirectly by a related person (namely, Opco, which is controlled by the child’s father) and, thus, would not constitute arm’s length capital when invested by the child in Opco. However, CRA indicated that the safe harbour capital return exclusion in s. (f)(i) of the "excluded amount" definition might be available.

In a separate branch of the same question, CRA also noted that s. (e)(i) of "excluded amount" excludes income of an over-17 individual for a taxation year that is not derived, directly or indirectly, from a related business in respect of the individual for the year. Accordingly, where a specified individual (Ms. Y) receives a dividend from an Investco - that does not carry on a business and pays the dividend out of funds received as a winding-up dividend from an Opco which had sold all its assets in a prior year - that dividend to Ms. Y would be an excluded dividend because it would not be considered to arise, directly or indirectly, from a related business in respect of Ms. Y for the year of receipt of the dividend: the former Opco business was not carried on in that year.

Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.17 under s. 120.4(1) - arm’s length capital – (c).