CRA finds that the 5-year excluded business exception does not restart on the business incorporation

Para. (b) of the “excluded business” definition of the tax on split income (TOSI) rules includes in an excluded business of a specified individual for a taxation year a business in which she was “actively engaged on a regular, continuous and substantial basis” (“Involved”) in “any five prior taxation years.” CRA followed the guidance in Finance’s Explanatory Notes and found that the five year test could be satisfied where the specified individual was Involved in the business for, say, three years while it was conducted by her spouse as a sole proprietorship, and for a further three years after it was rolled by him into a newly-incorporated Opco. In other words, it was the same business for TOSI purposes throughout the six years.

Accordingly, after she retired, she could receive a s. 104(19)-designated Opco dividend qua beneficiary of a family trust without being subject to the TOSI.

Neal Armstrong. Summary of 19 August 2019 External T.I. 2019-0814181E5 under s. 120.4(1) – excluded business – para. (b).