Since the Tax on Split Income (“TOSI”) legislation was released, there has been considerable consternation amongst professionals as to how the rules apply. Even the most sophisticated readers of the legislation agree that it contains provisions that are both ambiguous and somewhat complicated. Somewhat out of exasperation, many deal with the TOSI rules on the assumption that all income amounts received by shareholders, beneficiaries, and partners are subject to TOSI, until one can find an exemption. To make matters more “interesting”, the Canada Revenue Agency (“CRA”) and Department of Finance have released vague and, at times, conflicting interpretations on how the rules should apply to various scenarios.
At a recent round table of professionals, the CRA provided some clarity on the applicability of the TOSI rules to corporations and trusts that earn investment and rental income. The CRA was asked to reconcile its response to a question posed to it at a previous round table with what appeared to be contradictory guidance. At the center of the issue was whether the corporation was earning “income from property” or income from a “business”. The CRA did acknowledge that corporations whose principal purpose is to derive income from property, including interest, dividends, rents, and royalties, could be carrying on a “business” by virtue of engaging in a sufficient level of activity.
As a result, it appears that for corporations earning investment income, including rental income from non-related parties, whether dividends paid to its shareholders may be subject to TOSI will depend on whether it has a sufficient level of activity, such that it can be considered to be carrying on a “business”.
If it is determined that an investment corporation is not earning income from a “business”, dividends paid to a specified individual 18 years of age or older will not be subject to TOSI, so long as the amount is not derived, directly or indirectly, from a “related business” in the year. On the other hand, if it is determined that the investment corporation is carrying on a“business”, dividends paid to a specified individual 25 years of age or older will not be subject to TOSI, so long as the amount is paid on an “excluded share” (business is not a service business and not related to another business and the shareholder holds more than 10% of the FMV of the business and votes).
Therefore, for a stand-alone investment corporation (i.e., no other corporation, trust, or partnership carries on a “related business” in the year), dividends paid to a specified individual who turns 25 years of age in that calendar year (18 years of age if the corporation is not carrying on a “business”) should not be subject to TOSI.
This is helpful but the issue now is what level of activity constitutes a “business, that can be objectively quantified ”. The beat goes on!