CRA indicates that a conversion of shares received on marriage breakdown causes the TOSI exclusion for such shares to cease applying

Consequent on the breakdown of their marriage and separation, A, who held 80% of the shares of Opco, transferred a 20% shareholding to B such that para. (b) of the “excluded amount” definition in s. 120.4(1) now was satisfied. Although B was now deemed to not be related to A by virtue of s. 120.4(1.1)(e), the children of A and B, who held 20% of the Opco shares, continued to be “source individuals” in respect of B. Subsequent to such common share transfer, B’s common shares are converted on an Opco reorganization into Opco preference shares.

After noting that para. (b) referred only to property acquired by the individual (B) under a (marriage breakdown) transfer described in s. 160(4) and failed to refer to property substituted therefor, CRA indicated that since the preference shares were substituted property, the para. (b) exclusion ceased to apply when the common shares were converted to preference shares, so that B would be subject to TOSI on amounts derived from the preference shares if no other exclusion applied.

Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 10, 2024-1005811C6 under s. 120.4(1) – excluded amount – (b).