While it has been over 18 months since its implementation, we are still learning more about the application of the tax on split income (TOSI) rules.  The Canada Revenue Agency (CRA) provided guidance where shares of a private company are passed on to the children of the deceased.

The CRA was asked to comment on how the TOSI rules would apply when the deceased, Mrs. A, the co-owner of a private company with her husband that operated a service business which was an excluded business, bequeathed her shares (i) directly to her children or (ii) indirectly to her children through her surviving spouse.  Neither her children nor her surviving spouse had been actively engaged in the business.

There are several ways in which the shares may pass to the children on death such as:

• Mrs. A leaves her shares to Mr. A who, in turn passes the shares to their children.
• Mr. A leaves his shares to their children then Mr. A leaves his shares to their children.

In either scenario, the children are considered to have made the contributions of Mrs. A making the private company business an excluded business for them meaning all dividends received on the shares would fall outside the TOSI rules.

This is all good news for tax and estate planners in the still new TOSI era.  Thanks for reading.