No exclusions for indirect s. 55(3)(a) transfers or extraordinary discretionary dividends on existing shares ((p. 10)
- Where, following a separation, a holding company for one of the spouses receive assets through a s. 55(3)(a) spin-off transaction, the failure to receive property personally as described in s. 160(4) results in failure to access para. (b) of the “excluded amount” definition.
- A significant dividend received, as part of an equalization arrangement. on a share already owned by the spouse also would not be protected by para. (b).
No exclusion for transfers from grandparents or perhaps adoptive parents (p. 11)
- S. (a)(i) of “excluded amount” does not include transfers of property directly from grandparent to child.
- It is unclear whether it extends to a child inheriting property from an adoptive parent (either legally or in fact).
Exclusion for arm’s length borrowing even where no source-individual guarantee (p. 11)
The definition of “arm’s length capital” for adults who have not attained the age of 24 before the year excludes any borrowing by the specified individual under a loan or other indebtedness including from arm’s length sources. … If an individual borrows from an arm’s length party (e.g. a financial institution) without any security or guarantee provided by a source individual, that borrowing should conceptually be arm’s length. Finance should consider limiting paragraph (b) of the definition so that it carves out only those borrowings in connection with which financial assistance is provided by any source individuals who have attained the age of 24 before the year.
Broad scope including potential iterative derivation (pp. 11-12)
Would the following amounts be considered as derived directly or indirectly from a “related business” carried on by Opco in respect of a specified individual:
- A dividend from the Opco business is invested by the corporate recipient (Parentco) to earn investment income, with Parentco then paying a dividend therefrom to the specified individual.
- The Opco dividend is received by the specified individual, who invests it in shares of Opco 2, which does not carry on any “related business” respecting the individual, with the shares subsequently generating income or a capital gain. (“[I]t seems particularly inappropriate for the rule to apply in situations such as [this], where amounts could be deemed to be derived from a related business “through” amounts that have already been received by, and taxed in the hands of an individual.”)
- The “related business” of Opco in respect of the specified individual ceased 10 years ago, with Opco now paying out dividends from the passive investment income generated from the invested retained earnings.
- Opco lends to Investco, which invests the funds in passive investments and pays out dividends to the specified individual out of the investment income to the specified individual.
- Opco lends to Newco, which invests the funds in a business conducted by the specified individual, and pays out dividends to the specified individual from the income generated therefrom. “Is some sort of tracing required as to whether and what portion of Newco’s income is attributable to the capital from Opco, labour and other contributions of the specified individual, and/or other factors enabling Newco’s business to thrive?”
Para. (c) exclusion for income form a related business taints a holding company receiving dividends from a wholly-owned Opco with an active business (pp. 5-6)
- Mr. A, Ms. B and their son, AB, are equal shareholders of AB Co which carries on an active business. AB (age 25) unlike his parents who are active participants, has never been active in the business. Shares of AB Co are likely “excluded shares,” so that AB may receive an unlimited dividends without TOSI applying.
- Mr. E, Mrs. E and their son, EE, are equal shareholders of E Holdco, which holds 100% of E Opco that carries on an active business. E Opco distributed all its earnings to E Holdco as dividends. Mr. E and Mrs. E both actively engaged in the E Opco business, whereas EE (aged 25) and had never been active in the business. Shares of E Holdco cannot be “excluded shares” because all or substantially all of its income is derived, directly or indirectly, from a “related business,” i.e., its sole source of income was dividends received from E Opco, which paid the dividends out of a “related business”. Any dividend income or taxable capital gain earned by EE in the current year in respect of his E Holdco shares will be subject to TOSI.
Exclusion of shares held through trust (p. 13)
The preamble of the “excluded shares” definition requires that the shares be “owned by the specified individual”. Since subsection 104(2) deems a trust to be a separate individual in respect of trust property, a specified individual who is a beneficiary of a trust can never access the “excluded shares” exception with respect to shares held by the trust.
Failure of attribution rules to dovetail with excluded shares definition (p. 15)
Attributed dividend income can never qualify for the “excluded shares” exclusion because attribution does not deem the specific share from which the dividend arises to be owned by the individual to whom income or capital gain is attributed.
Definition does not extend to a partial under-10% bloc (p. 16)
- The exclusions in s. (g)(i) of “excluded amount” apparently does not apply to a taxable capital gain arising where the specified individual undertakes a partial disposition such that the shares being disposed of are below the 10% votes and value threshold.
- E.g., Mr. A, holding shares of Opco representing 20% of the votes and value, sells a bloc representing 5% of the votes and value.
Valuation difficulties where shares of Opco are held through a trust (p. 13)
- Para. (c) of “related business” looks at whether a specified individual owns shares or “property that derives, directly or indirectly, all or part of its fair market value from shares…” exceeding the 10% relative valuation threshold, its application will be unclear \where the shareholder of the corporation is a trust.
- The capital beneficiaries of the trust own a beneficial interest in the trust property, which should be considered “property”. “Even if the value of a beneficiary’s capital interest can be determined, it will be a difficult to determine what portion of the fair market value of that interest is derived from the shares of the corporation.”
Failure to exclude public corps and mutual funds (p. 13)
- The definition of “related business” does not exclude listed corporations or mutual fund trusts or corporations.
- For example, a specified individual is a beneficiary of a trust holding shares of a listed arm’s length corporation of which a Canadian-resident sibling is a full-time employee, such that this public corporation is carrying on a “related business” in respect of the specified individual, and so that any income or taxable capital gain of the specified individual included under s. 104(13) or 105(2) in respect of the trust would seem to be subject to TOSI.
Uncertainty as to tainting effect of a deceased source individual (p. 16)
Where a business used to be operated by a source individual who is now deceased, it is uncertain whether the business will remain a “related business”, or whether the income from such business going forward will still be considered “derived directly or indirectly from a related business”.
5 taxation years of the specified individual may be what is referenced (p. 13)
- It is unclear whether “any five prior taxation years” refers to taxation years of the individual or of the entity carrying on the business.
- "Given that the definition of ‘excluded business’ (as well as the 20-hour deeming rule in paragraph 120.4(1.1)(a)) is relevant to a taxation year of the specified individual, it appears that [this phrase] refers to taxation years of the specified individual."
Failure of attribution rules to dovetail with excluded amount definition (p. 15)
- Where s. 75(2) or 56(4.1) deems an amount of taxable capital gain to be “of the person”, it does not deem the person to have disposed of property, so that the attributed taxable capital gain cannot be an “excluded amount” (because the preamble requires a disposition of a property).
- The deemed interest income inclusion under the subsection 74.4(2) corporate attribution rule is not deemed to be an income from property or from a specific debt obligation. It is unclear whether such deemed interest income could be caught under paragraph of the “split income” definition and if so, whether it can access the “excluded amount” provision.
Failure of attribution rules to generate FTCs (p. 15)
Attributed income will not be entitled to foreign tax credits under subsection 120.4(3) because foreign tax is not deemed to be paid by the individual to whom income or capital gain is attributed. This is a broader issue than TOSI as this mismatch arises also with Part I income tax whenever income is attributed.
Insufficient flow through of attributes under QSBC provisions to beneficiary of trust (p. 16)
- As the qualified small business corporation (“QSBC”) and qualified farm or fishing property (“QFP”) provisions do not deem the QFP or QSBC share to be owned by the beneficiary of a trust, a specified individual allocated such taxable capital gain cannot assess the exclusion in (d) of “excluded amount”, because the QFP or QSBC share is not “of the individual”.
Flow-through of attributes on 3rd generation transfers, inheritance from active and inactive parents or as a result of single property transmission respecting a business (pp. 14-15)
- It is not entirely clear whether s. 120.4(1.1) applies for third-generation transfers, e.g., Person 2 inherits property (and attributes) from Person 1, and then Person 3 inherits property (an attributes?) from Person 2.
- S. 120.4(1.1)(b) specifically limits the inheritance of attributes to those of the deceased. Mother and Father own 50% of Opco, which carries on an “excluded business” in respect of Mother only (Father has been inactive). Son, who inherits Opco shares from them, inherits the attributes of Mother so that Opco’s business is considered an “excluded business” of Son for the remainder of his lifetime. “Whereas, Daughter inherits the attributes of Father and will not be able to access the “excluded business” or “reasonable return” exclusions unless she becomes actively engaged in the business. The property acquirer should arguably inherit the attributes of the deceased and any current and former spouse or common-law partner of the deceased.”
- It appears that the application of s. 120.4(1.1)(b) can be triggered by the inheritance of a single property, and the benefit of its application is applied to all properties of the inheriting individual with respect to the business in question.
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