12 March 2025 External T.I. 2025-1053231E5 - Effects of a Power of Attorney on TOSI

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether a Power of Attorney would affect the ownership of shares with respect to the definition of "excluded shares" in subsection 120.4(1).

Position: A Power of Attorney acts as an agent for the owner of the shares, but does not change who owns them or who is beneficially interested.

XXXXXXXXXX									2025-105323

March 12, 2025

Dear XXXXXXXXXX:

Re: Tax on Split Income (TOSI)

We are writing in response to your request for an interpretation regarding the definition of “excluded shares” in subsection 120.4 (1) of the Income Tax Act (Act) in the hypothetical situation described below. All statutory references below are to the Act.

1. Adult Child is an individual who is over 24 years old at the beginning of 2025.

2. Adult Child is a beneficiary of a Family Trust (“FT”). The trustees of the FT are the Adult Child’s parents.

3. The FT holds 100 Common shares in a corporation (Aco), a Canadian-controlled private corporation. The only authorized and issued share capital of Aco are 100 Common shares. Each share has the right to one vote per share.

4. Aco meets the conditions in paragraphs 120.4(1)(a) and (c) of the definition of “excluded shares”.

5. Adult Child is a “specified individual” and his father (Father) is a “source individual” according to the respective definitions of these terms in subsection 120.4(1).

6. In 2025, the FT distributes 10 Common shares of Aco to Adult Child under subsection 107(2). Adult Child is now the legal owner of 10 Common shares of Aco.

7. Adult Child grants his Father a power of attorney (“POA”) with respect to the 10 Common shares. Under the POA, Father can exercise all rights, privileges, restrictions and conditions attached to the Common shares except as expressly excepted.

Question

Will the POA granted to Father result in the 10 Common shares not being “excluded shares” of Adult Child under paragraph 120.4(1)(b) of the definition. More specifically, if Adult Child is the legal owner of the 10 Common shares and is legally entitled to the value that is attached to them, would Adult Child still be considered to own the shares if Father is given a POA to exercise the rights attached to the Common shares?

Our Comments

Please note that it is not our practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. For information on applying for an advance income tax ruling, see Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations. Notwithstanding the foregoing, we are prepared to provide following general comments in respect of the hypothetical circumstances described above.

The definition “excluded shares” in subsection 120.4(1) states:

excluded shares, of a specified individual at any time, means shares of the capital stock of a corporation owned by the specified individual if

a) the following conditions are met:

i) less than 90% of the business income of the corporation for the last taxation year of the corporation that ends at or before that time (or, if no such taxation year exists, for the taxation year of the corporation that includes that time) was from the provision of services, and

ii) the corporation is not a professional corporation;

b) immediately before that time, the specified individual owns shares of the capital stock of the corporation that

i) give the holders thereof 10% or more of the votes that could be cast at an annual meeting of the shareholders of the corporation, and

ii) have a fair market value of 10% or more of the fair market value of all of the issued and outstanding shares of the capital stock of the corporation; and

c) all or substantially all of the income of the corporation for the relevant taxation year in subparagraph (a)(i) is income that is not derived, directly or indirectly, from one or more related businesses in respect of the specified individual other than a business of the corporation.

Specifically at issue are the requirements found in paragraph (b) of the definition. We assume that the Common shares distributed to the Adult Child would have 10% of the votes that could be cast at an annual meeting of shareholders and would represent 10% of the fair market value of all of the issued and outstanding shares of the capital stock of Aco.

You state that, pursuant to the POA, Father may exercise the rights attached to the shares of Aco distributed to the Adult Child. Although Father may exercise the rights attached to the shares, it is our understanding that the POA would not involve a transfer of the legal or beneficial ownership of such shares to Father. Therefore, as a matter of law, and for the purposes of paragraph (b) of the definition of “excluded shares” in subsection 120.4(1), Adult Child would own the shares.

Please note that we have limited our comments to whether the Adult Child would, in the above circumstances, own the shares that are the subject of the POA. We have not considered the potential application of any other provisions of the Act that may impact the application of the TOSI rules or that would impact any tax benefit that may be associated with the transactions described above.

We trust the foregoing addresses your question.

Yours truly,

Daryl Boychuk
Reorganization Section II
Reorganization Division
Income Tax Rulings Directorate