Post on 11-Mar-2020
The TOSI Rules –
What’s new?
Règles relatives au
fractionnement du
revenu – Quoi de neuf?
Katherine Borsellino, LL.B, J.D., LL.M (Fisc.)
Emilie Champagne-Couillard, LL.B, D.E.S.S. (Fisc.)
Richter LLP
Montreal
November 16, 2018
2
The TOSI Rules – What’s new?
Tax on Split Income (Kiddie Tax) – Pre 2018
• Purpose
− Limit and/or eliminate income splitting with minor children
• Application
− Canadian resident individual under the age of 18 (“Specified individual”)
− Earning certain forms of income from a private corporation, partnership or trust
(“Split income”)
− Exception for certain “Excluded amounts”
• Consequence
− Income is subject to the highest individual tax rate
− Certain personal tax credits are denied
3
The TOSI Rules – What’s new?
Tax on Split Income (TOSI) – As of 2018
• Purpose
− Limit and/or eliminate income splitting with minors
− Limit and/or eliminate income splitting with adults
• Definitions
MODIFIED / EXPANDED DEFINITIONS
MODIFIÉES / ÉTENDUES
NEW / NOUVELLES
DEFINITIONS
• Excluded amount / Montant exclu
• Specified individual / Particulier déterminé
• Split income / Revenu fractionné
• Arm’s length capital / Capital indépendant
• Excluded business / Entreprise exclue
• Excluded shares / Actions exclues
• Reasonable return / Rendement
raisonnable
• Related business / Entreprise liée
• Safe harbor capital return / Rendement
exonéré
• Source individual / Particulier source
4
The TOSI Rules – What’s new?
TOSI – Application
• Specified individual/ Particulier déterminé
− Individual (other than a trust) who is a resident in Canada (at the end of the year
or immediately before their death); or
− Minor who has a parent resident in Canada at any time of the year
• Split income / Revenu fractionné
− Dividend income (or shareholder benefit) derived from a [private] corporation
− Capital gains derived from the disposition of shares of a [private] corporation, an
interest in a partnership or trust or a debt obligation
− Certain partnership income and capital gains derived from a related business or
the rental of property (where a related person is actively engaged on a regular
basis in the activities related to the rental of property)
− Certain trust income and capital gains derived from a related business or the
rental of property (where a related person is actively engaged on a regular basis
in the activities related to the rental of property)
− Certain interest income derived from a [private] corporation, partnership or trust
5
The TOSI Rules – What’s new?
TOSI – Application
• Related business / Entreprise liée
− Business carried on by a source individual
− Business carried on by a partnership, corporation or trust if a source individual is
actively engaged on a regular basis in the activities of the partnership
corporation or trust
− Business of a partnership if the source individual has an interest in the
partnership (directly or indirectly) at any time during the year
− Business of a corporation if a source individual owns shares or property
representing 10% or more of the FMV of the shares of the corporation
6
The TOSI Rules – What’s new?
TOSI – Application
• Source individual / Particulier source
− Individual (other than a trust) who is a resident in Canada and is related to the
specified individual
• Related – para. 251(2)a)
• Deemed not related if living separate and apart because of marriage or
common-law relationship breakdown – para. 120.4(1.1)(e)
• Consequence
− Income is subject to the highest individual tax rate – 120.4(2)
− Certain personal tax credits are denied
7
The TOSI Rules – What’s new?
TOSI
• Exceptions
− Income, capital gain or profit to the extent that such amounts qualify as an
excluded amount
− Inheritance
− Source individual who is 65 +
8
The TOSI Rules – What’s new?
ExampleSettlor: 3rd party
Trustees: Founder
3rd party non-settlor, non-beneficiary
Beneficiaries:
• Founder (source individual and specified individual)
• Spouse (specified individual)
• Child 1 (25 +) - full time (source individual and
specified individual)
• Child 2 (18-24) - part time (specified individual)
• Child 3 (minor) (specified individual)
• Corporations controlled by Founder
9
The TOSI Rules – What’s new?
During Operations – Employment Income
• TOSI does not apply to employment income
• General limitations when computing income will apply
− Income producing purpose (para. 18(1)(a))
− Non-capital expense (para. 18(1)(b))
− Reasonable (section 67)
− Shareholder benefit (section 15)
10
The TOSI Rules – What’s new?
During Operations – Dividend Income
Excluded Amount – Non-Related Business / Entreprise non liée
(120.4(1)(e)(i))
SPECIFIED INDIVIDUAL CONDITIONS OF APPLICATION
X Founder
X Spouse
X Child 1 (adult, 25+)
X Child 2 (adult, 18-24)
X Child 3 (minor)
> 17 years old
x Not derived, directly or indirectly, from a related
business for the year
• Business carried on by a source individual (or)
Business carried on by a corporation where a source
individual is actively engaged on a regular basis
• Business of a corporation if a source individual owns
shares or property representing 10% or more of the
FMV of the shares of the corporation
11
The TOSI Rules – What’s new?
During Operations – Dividend Income
Excluded Amount – Excluded Business [for the year] / Entreprise
exclue (120.4(1)(e)(ii))
SPECIFIED INDIVIDUAL CONDITIONS OF APPLICATION
✓ Founder
X Spouse
✓ Child 1 (25+)
~ Child 2 (18-24)
X Child 3 (minor)
> 17 years old
✓ Individual is actively engaged on a regular, continuous and
substantial basis in the activities of the business in the
current year or any 5 prior taxation years
− Depends on the facts and circumstances
− 120.4(1.1)(a): Deeming rule where individual works at
least an average of 20 hours per week during the
portion of the year in which the business operates
− Any 5 prior taxation years of the specified individual
12
The TOSI Rules – What’s new?
During Operations – Dividend Income
Excluded Amount – Excluded shares / Actions exclues
(120.4(1)(g)(i))
SPECIFIED INDIVIDUAL CONDITIONS OF APPLICATION
~ Founder
X Spouse
X Child 1 (25+)
X Child 2 (18-24)
X Child 3 (minor)
> 24 years old
Shares owned by the specified individual if:
a) (i) Less than 90% of the business income of the
corporation was from the provision of services
(ii) the corporation is not a professional corporation
(accountant, dentist, lawyer, medical doctor,
veterinarian or chiropractor)
b) the specified individual owns shares that represent
10% or more of the votes and FMV
c) all or substantially all of the income for the year is not
derived, directly or indirectly, from one or more other
related businesses other than a business of the
corporation
13
The TOSI Rules – What’s new?
During Operations – Dividend Income
Excluded Amount – Safe Harbour Capital Return / Rendement
exonéré (120.4(1)(f)(i))
SPECIFIED INDIVIDUAL CONDITIONS OF APPLICATION
X Founder
X Spouse
X Child 1 (25+)
~ Child 2 (18-24)
X Child 3 (minor)
18-24 years old
Return up to the highest prescribed rate of interest in effect for a
quarter in the year
• 2% as of April 2018
FMV of property contributed in support of the related business
• Pro rata according to the number of days in the year that
the property (or substituted property) is used in support of
the business
• Within the safe harbour: TOSI does not apply
• Amount exceeding the safe harbour: TOSI does apply
14
The TOSI Rules – What’s new?
During Operations – Dividend Income
Excluded Amount – Reasonable Return / Rendement raisonnable
(120.4(1)(g)(ii))
SPECIFIED INDIVIDUAL CONDITIONS OF APPLICATION
✓ Founder
X Spouse
✓ Child 1 (25+)
X Child 2 (18-24)
X Child 3 (minor)
> 24 years old
✓ Amount derived directly or indirectly from a related business
✓ Reasonable having regard to the relative contributions of the
specified individual and each source individual in support of
the related business
a) Work performed
b) Property contributed
c) Risks assumed
d) Historical payments
e) Other relevant factors
• Reasonable amount: TOSI does not apply
• Unreasonable amount: TOSI does apply
15
The TOSI Rules – What’s new?
During Operations – Dividend Income
Excluded Amount – Reasonable Return Arm’s Length Capital /
Rendement raisonnable – capital indépendant (120.4(1)(f)(ii))
SPECIFIED INDIVIDUAL CONDITIONS OF APPLICATION
X Founder
X Spouse
X Child 1 (25+)
X Child 2 (18-24)
X Child 3 (minor)
18-24 years old
Reasonable Return
Limited to contributions of arm’s length capital, being property
contributed by the specified individual that was not
− Derived, directly or indirectly, from a related business
− Borrowed under a loan or indebtedness
− Transferred, directly or indirectly by any means
whatever, from a related person (other than as a
consequence of death)
• Reasonable amount: TOSI does not apply
• Unreasonable amount: TOSI does apply
16
The TOSI Rules – What’s new?
Upon the Sale of Opco and/or Holdco
Excluded Amount
• Capital gain realized on the disposition of shares that qualify as excluded shares
• Capital gain realized on the disposition of an excluded business
• Capital gain realized on the disposition of a non-related business
17
The TOSI Rules – What’s new?
Upon the Sale of Opco and/or Holdco
Excluded Amount – QFFP or QSBC (120.4(1)(d))
• No age limitation
• A taxable capital gain from the disposition of qualified small business corporation
(“QSBC”) shares and qualified farm or fishing property (“QFFP”) will not be subject
to TOSI
− Preserves the availability of the lifetime capital gains exemption (“LCGE”)
• This exception is not applicable to a taxable capital gain that is deemed to be an
ineligible dividend under subsection 120.4(4) or (5) – minors only
− Deemed dividend is subject to highest individual tax rate but dividend tax credit
is not denied
− The LCGE will be available to minors if there is a disposition to an arm’s length
party
− The LCGE will be available to minors if a capital gain arises as a consequence
of death
18
The TOSI Rules – What’s new?
Upon the Breakdown of a Marriage or
Common-law PartnershipExcluded Amount – The Break-up Exception (120.4(1)(b))
• No age limitation
• Property acquired by a spouse following the breakdown of a marriage or common-
law partnership
• The income derived from said property will not be subject to TOSI
− Decree, order or judgement of a competent tribunal or a written separation
agreement; and
− The taxpayer and their spouse or common-law partner were separated and
living apart as a result of the breakdown of their marriage or common-law
partnership
19
The TOSI Rules – What’s new?
Example
Settlor: 3rd party
Trustees: Founder
3rd party non-settlor, non-beneficiary
Beneficiaries:
• Founder (source individual and specified individual)
• Spouse (specified individual)
• Child 1 (25 +) - full time (source individual and
specified individual)
• Child 2 (18-24) - part time (specified individual)
• Child 3 (minor) (specified individual)
• Corporations controlled by Founder
20
The TOSI Rules – What’s new?
Upon the Retirement of Founder (+65 years
old)
• Founder (see previous slides)
• Excluded business
• Reasonable return – Does this still apply?
• Spouse
• No excluded amount exceptions are applicable
• “Baby Boomer Exception” (120.4(1.1)(c)(i))
✓ Founder is +65 years old
✓ TOSI does not apply to Founder due to an excluded amount
✓ TOSI will not apply to the spouse or common-law partner of Founder
21
The TOSI Rules – What’s new?
Upon the Retirement of Founder (+65 years
old)
• Child 1 (25+) (see previous slides)
• Excluded business
• Reasonable return
• Child 2 (18-24) (see previous slides)
• Excluded business?
• Safe Harbor Capital Return?
• Child 3 (minor) (see previous slides)
• No excluded amount exceptions are applicable
22
The TOSI Rules – What’s new?
Upon the Death of Founder
Excluded Amount – Capital gains on death (120.4(1)(c))
• Founder
• No age limitation
• Taxable capital gains realized upon death are not subject to TOSI
23
The TOSI Rules – What’s new?
Upon the Death of Founder
Excluded Amount – Inheritance (120.4(1)(a))
SPECIFIED INDIVUDAL
(HEIRS)EXCLUDED AMOUNT – INHERITANCE EXCEPTIONS
Children < 25 years • Income from property inherited from a parent
Others < 25 years • Income from property inherited from anyone if full-
time student enrolled in a post-secondary
institution or eligible for the disability tax credit
24
The TOSI Rules – What’s new?
Upon the Death of Founder
Other Inheritance Exceptions – Continuity Rules
SPECIFIED INDIVIDUAL
(HEIRS)EXCLUDED AMOUNT – INHERITANCE EXCEPTIONS
Children > 17 years
Others > 17 years
(120.4(1.1)(b))
• Continuity rule for inherited property
− Reasonable Return: contributions of the deceased
will be those of the heir
− Excluded Business: if the deceased was actively
engaged on a regular and continuous basis, the
heir will be deemed to be as well
− Excluded Shares: if the deceased held excluded
shares, the heir will be deemed to have attained
age 24 before the year
Income earned from inherited property will not be
subject to TOSI
25
The TOSI Rules – What’s new?
Upon the Death of Founder
Other Inheritance Exceptions – Continuity Rules
SPECIFIED
INDIVIDUAL (HEIRS)EXCLUDED AMOUNT – INHERITANCE EXCEPTIONS
Spouse
(120.4(1.1)(c)(ii))
• Continuity rule for inherited property
− Income earned from inherited property will
qualify as an excluded amount for the spouse if
it was an excluded amount for the deceased
26
The TOSI Rules – What’s new?
Recent Technical Interpretations
27
The TOSI Rules – What’s new?
8 May 2018 Roundtable, 2018-0745871C6 – CALU
Conference Question 6 – Tax on Split Income• Excluded Amount – Excluded Shares
• Question 6(a): What is included as income from the
provision of services?
• Whether a business will be considered to be engaged in the provision of
services will depend of the facts and circumstances of the business
• Question 6(b): Can shares of a holding corporation qualify
as excluded shares?
• The definition of excluded shares should generally not include shares of a
holding company because, in the case of a holding corporation, all or
substantially all of the income would be derived from a related business
(other than a business carried on by the holding corporation)
28
The TOSI Rules – What’s new?
May 29, 2018 – STEP Q. 5 – Split Income – Definition of
“excluded shares”
• What does “income” and “business income” mean?
• Distinction to be made between “business income” (para. (a)(i) of excluded
shares) and “income” (para. (c) of excluded shares)
• Business income will depend on the facts and circumstances
• Income refers to any source of income
• Generally means GROSS income
• What if a corporation has income from the provision of both
services and non-services?
• The income should be computed separately
• The non-service income should be taken into account in determining whether
shares are excluded shares
• UNLESS the income can reasonably be considered to be necessary but
incidental to the provision of the services
29
The TOSI Rules – What’s new?
May 29, 2018 – STEP Q. 6 – Split Income – Can shares
of a Holdco qualify as “excluded shares”?
• Can shares of a holding company qualify as excluded shares?
• Generally, no, since all or substantially all of the income [of Holdco] is derived
from a related business [Opco] (other than a business of Holdco).
• CRA confirms that, although the excluded shares exception does not apply,
another exclusion can apply.
• Example: TOSI will not apply if it is a non-related business or an excluded
business of the specified individual or if the income constitutes a
reasonable return.
• However, CRA indicates that “the most appropriate test” to determine the
non-application of TOSI should be based on the general test of whether the
amount received is a reasonable return.
30
The TOSI Rules – What’s new?
May 29, 2018 – STEP Q. 7 – Split Income – Excluded
shares and business income
• If a corporation does not have any business income, can its
shares qualify as excluded shares?
• No
• Condition in subpara. (a)(i) states that less than 90% of the business income is
from the provision of services; therefore, the corporation must have business
income to test
• (Services Income) < 0.9 (Business Income)
• If both services income and business income = zero, the condition has been
failed.
31
The TOSI Rules – What’s new?
October 2018 – APFF Roundtable – Q. 9 – Excluded
shares
Question 9(a): Can shares of a Holdco qualify as excluded
shares?
> If Holdco carries on a business: the shares of Holdco may qualify as excluded
shares
• “Business” is not defined but the concept can expand to the undertaking of any
kind (248(1))
• The principal purpose of a business may be to derive income from property
(interest, rents, dividends, royalties)
> If Holdco does not carry on a business: the shares of Holdco cannot qualify as
excluded shares
• If income from Holdco does not derive directly or indirectly from a related
business, TOSI does not apply (non-related business exception)
32
The TOSI Rules – What’s new?
October 2018 – APFF Roundtable – Q. 9 – Excluded
shares
• Question 9(b) and (c)
Opco
Holdco
Mr.Mrs.
33
The TOSI Rules – What’s new?
October 2018 – APFF Roundtable – Q. 9 – Excluded
shares
Question 9(b)
• Holdco’s only revenue in the year derives from dividends from Opco
• Mrs. X would not own excluded shares because all or substantially all of Holdco’s
income derives from a related business (Opco)
• Again, CRA states that, although the excluded shares exception does not apply,
another exclusion may apply
34
The TOSI Rules – What’s new?
October 2018 – APFF Roundtable – Q. 9 – Excluded
shares
Question 9(c)
• Holdco owns passive investments acquired many years ago using dividends
received from Opco
• If Holdco carries on a business which earns income derived from property, the
shares held by Mrs. X would be excluded shares, “notwithstanding that the capital
used in the acquisition of property used in carrying on the business of Holdco was
derived from Opco” (condition (c) is met)
• Income of Holdco was not derived, directly or indirectly, from one or more related
business but rather derived from the business carried on by Holdco
• CRA will consider GAAR if transactions are effected so that shares qualify as
excluded shares to avoid 120.4
35
The TOSI Rules – What’s new?
October 2018 – APFF Roundtable – Q. 10 –
Discretionary trust interests and s. 120.4 “related
business” valuation
• Property referred to in cl. (c)(i)(B) of the related business definition includes:
• shares of a corporation
• interest in a partnership
• interest in a trust (regardless of whether the trust is discretionary or not)
• Question of whether all or part of the FMV of a property is derived, directly or
indirectly from shares is a question of fact
• The determination of the FMV of an interest in a discretionary trust is a question of
valuation
36
The TOSI Rules – What’s new?
October 2018 – APFF Roundtable – Q. 11 – Tracing
dividends paid by Holdco to stock portfolio rather than
related business
Opco
ParentHoldco
Kid
Holdco Income:
150 K passive investments
100 K Opco dividendC/S
P/S
37
The TOSI Rules – What’s new?
October 2018 – APFF Roundtable – Q. 11 – Tracing
dividends paid by Holdco to stock portfolio rather than
related business
• Is the dividend from Holdco to Kid subject to TOSI?
• Holdco must adequately monitor its funds derived from Opco and funds derived from its
portfolio in order to determine which funds are used to pay a dividend
• If funds derive from Opco:
• Dividend would derive directly or indirectly from a related business
• If funds derive from portfolio:
• If Holdco carries on a business:
• Business would not qualify as a related business – there is no source
individual who is active in Holdco or has significant ownership of Holdco
• TOSI does not apply
• If Holdco does not carry on a business:
• There is no related business
• TOSI does not apply
38
The TOSI Rules – What’s new?
October 2018 – APFF Roundtable – Q. 12 – 120.4 non-
application to partnership holding listed shares
• Family partnership that generates and distributes passive income from stock market
investments to Parents and Children
• Children have not contributed to or been involved in the Partnership, compared
to Parents who communicate with broker four times per year
• Is the partnership income subject to TOSI?
• There is no split income:
• dividend income or capital gain received by any of the partners
• in respect of shares:
• listed on a designated stock exchange, or
• of a mutual fund corporation
• CRA will review the application of various provisions
39
The TOSI Rules – What’s new?
October 2018 – APFF Roundtable – Q. 13 – Split
income tax and distribution of reinvested capital gain
Portfolio generated $150,000 passive income. Holdco will pay a $100,000 dividend
on a prorata basis (directly to individuals and indirectly via the Trust)
Holdco
Kid X (minor)Mr. Mrs.
Kid Y (22)
40
The TOSI Rules – What’s new?
October 2018 – APFF Roundtable – Q. 13 – Split
income tax and distribution of reinvested capital gain
• Trust sold shares of an Opco and allocated the capital to the family. They each
claimed LCGE
• Parents and Children acquired shares of Holdco using capital from the Trust
• Holdco used the subscription proceeds to acquire an investment portfolio
• Holdco pays dividend to its shareholders from the income earned from the portfolio
• Does TOSI apply to the dividends received by Mr., Mrs., Kid X and Kid Y from
Holdco or from a trust distribution?
41
The TOSI Rules – What’s new?
October 2018 – APFF Roundtable – Q. 13 – Split
income tax and distribution of reinvested capital gain
• Kid X (minor) – TOSI applies
• Kid Y, Mr. and Mrs. (adults)
• If Holdco does not carry on a business
• TOSI does not apply to a dividend received from Holdco or from a
trust distribution (non-related business exception)
• If Holdco does carry on a business
• Non-related business exception does not apply
• Kid Y: Safe Harbour Capital Return exception might apply to a
dividend received from Holdco or from a trust distribution
• Mr. and Mrs.: Excluded shares exception might apply to a dividend
received from Holdco and Reasonable return exception might apply
to a dividend received from a trust distribution
42
The TOSI Rules – What’s new?
October 2018 – APFF Roundtable (Financial strategies
and instruments) – Q. 2 – Excluded shares and TOSI
> CRA comments on Q.7 from the STEP Roundtable as well as example 10 and 12
from the CRA guidelines
> Exclusions are applicable not only to entities that carry on an active business but
also to entities that carry on a business whose principal purpose is to derive
income from property (assuming that there is a sufficient level of activity)
> Answer mirrors Q. 9(a) APFF Roundtable
> If Holdco carries on a business: the shares of Holdco may qualify as excluded
shares
> If Holdco does not carry on a business: the shares of Holdco cannot qualify as
excluded shares
43
The TOSI Rules – What’s new?
October 2018 – APFF Roundtable (Financial strategies
and instruments) – Q. 3 – Testamentary trust and TOSIFacts
• Life insurance proceeds and stock market investments are left to a Testamentary
Spousal Trust, whereby the spouse of the deceased is the sole beneficiary and the
children are trustees
• Trust generates passive income (dividends, capital gains and interest on bonds)
Question
• Under different management scenarios, will the passive income distributed to
Spouse subject to TOSI?
Response
• Do the different sources of income qualify as split income – is it reasonable to
consider that it derives directly or indirectly from a related business?
• Dividends and capital gains: derived from public corporations; therefore, not split
income and TOSI does not apply
• Interest: split income ? Derived directly or indirectly from a related business? If so,
do any inheritance/ continuity rules apply?
44
The TOSI Rules – What’s new?
October 2018 – APFF Roundtable (Financial strategies
and instruments) – Q. 4 – Trusts, rental income and
TOSIFacts
• Testamentary spousal trust owns five commercial rental properties, which were
previously managed by the deceased
Question
• Under different management scenarios, will the rental income distributed to Spouse
subject to TOSI?
Response
• Does the rental income qualify as split income – is it reasonable to consider that it
derives directly or indirectly from a related business?
• Does the trust carry on a business? Is a source individual actively involved in the activities
of the trust?
• If so, an inheritance/ continuity rule can apply such that the income would be
deemed to be an excluded amount for the Spouse (since the income would have
been an excluded amount to the deceased [120.4(1.1)c)(ii)])
45
The TOSI Rules – What’s new?
October 2018 – APFF Roundtable (Financial strategies
and instruments) – Q. 15 – TOSI – excluded shares and
business income
• CRA confirms that if a corporation does not have business income,
its shares cannot qualify as excluded shares (reiterates STEP, Q.
7)
46
The TOSI Rules – What’s new?
May 25, 2018 – 2018-0761601E5 – Tax on Split Income
• General comments provided related to the definition of excluded
shares and excluded business
47
The TOSI Rules – What’s new?
July 6, 2018 – 2018-0759521E5 – Tax on split income
and preferred beneficiary
• CRA confirms that the definition of split income includes trust
distributions but not preferred beneficiary amount under s. 104(14)
48
The TOSI Rules – What’s new?
August 21, 2018 – 2018-0771811E5 – Excluded shares
– 10 % or more Votes & Value Test
• For the purpose of the vote & value test in para. (b) of the definition
of excluded shares, ownership of multiple classes of shares should
be considered.
49
The TOSI Rules – What’s new?
September 26, 2018 – 2018-0770911E5 – Revised
income sprinkling rules• CRA states that a shareholder-spouse may be exempt from TOSI
under the excluded business exception if the spouse does not work
for a portion of the year due to birth or adoption of a child –
sufficient involvement can still be proven even if the 20-hour test is
not met. Same may be true in case of illness.
• CRA does not comment on application of excluded shares
exception due to insufficient details.
50
The TOSI Rules – What’s new?
November 2, 2018 – 2018-0771861E5 – TOSI and the
meaning of “derived directly or indirectly from a
related business”
• Facts
Will dividend income be considered to derive directly or indirectly from a related
business in the following scenarios:
Investco
Mr. Mrs.
Opco
51
The TOSI Rules – What’s new?
November 2, 2018 – 2018-0771861E5 – TOSI and
the meaning of “derived directly or indirectly from
a related business”1. If Investco pays all of the dividend income from the publicly traded
corporations to Mrs:
• If Investco does not carry on a business : non-related business exception
would apply and, therefore, TOSI would not apply
• If Investco does carry on a business : non-related business exception would
not apply and we would need to determine if another exception could apply.
52
The TOSI Rules – What’s new?
November 2, 2018 – 2018-0771861E5 – TOSI and
the meaning of “derived directly or indirectly from
a related business”2. If Investco pays a dividend in kind to Mrs and transfers the portfolio to
Mrs:
• Y1 Opco dividend to Investco = $1M and Investco acquires the Portfolio
• Y2 Holdco pays dividend in kind = $1.1M
• The portion of the FMV of the portfolio that represents the initial investment
of the Opco dividends ($1M) would be considered to be derived, directly or
indirectly, from a related business of Opco – non-related business exception
does not apply
• If Investco does not carry on a business:
• The portion of the gains (100K) would not be considered to be derived,
directly or indirectly, from a related business of Opco or Investco – non-
related business exception applies
• If Investco does carry on a business: non-related business exception would not
apply and we would need to determine if another exception could apply.
53
The TOSI Rules – What’s new?
November 2, 2018 – 2018-0771861E5 – TOSI and
the meaning of “derived directly or indirectly from
a related business”
3. If all the dividends from Opco to Investco we paid prior to new
TOSI (pre-2018), would the answers be different:
• Conclusions above would not change
54
The TOSI Rules – What’s new?
November 2, 2018 – 2018-0771851E5 – Meaning of
“reasonable return”
Loan has now been repaid by Xco to Mr. and Mrs.
Xco
Mr. Mrs.
Start-up capital:
mortgage proceeds loaned by
Mr. and Mrs.
55
The TOSI Rules – What’s new?
November 2, 2018 – 2018-0771851E5 – Meaning of
“reasonable return”• Q.1: If Mr. receives a dividend from Xco, would the reasonable return
exception apply to him in regards to the risks he initially assumed on
the start-up of Xco’s business ?
• CRA would consider the fact that both Mr. and Ms. risked their family home by
mortgaging it in order to provide the Loan to Xco
• CRA would also consider if they were both adequately compensated for taking
the risk, based on the terms and conditions of the Loan
• If the terms of the Loan were not sufficient, the relative risk assumed could be
taken into account in determining whether a dividend received by Mr. X after the
repayment of the Loan is a reasonable return
56
The TOSI Rules – What’s new?
November 2, 2018 – 2018-0771851E5 – Meaning of
“reasonable return”
• Q.2: Can Mr. look at the undistributed retained earnings of Xco as
capital that is at risk for purposes of this exception?
• The undistributed retained earnings of Xco do not represent capital
contributed directly or indirectly by either of Mr. or Ms.
• This factor is not relevant in assessing their relative contributions to the
related business carried on by Xco
57
The TOSI Rules – What’s new?
Conclusion
• TOSI seems to apply as a general rule, subject to various
exceptions
• The exceptions are not mutually exclusive
• Income splitting opportunities are limited but not impossible
- Depends on the age of the specified individual
- Depends on the type of income earned by the specified individual and/or the
entity carrying on the business
- Depends on type of business …… and the existence of a business
- Depends on the contributions in support of the business
- Depends on different stages of life of the specified individual and the entity
carrying on the business
58
The TOSI Rules – What’s new?
Conclusion
• Implementing a freeze
− Remains an important estate planning measure for the freezor
− Remains an important tool in the integration of future generations and key
employees (either through a trust or direct ownership)
• Trusts
− Creditor protection benefit remains
− Family dynamic consideration still relevant
− Multiplication of LCGE remains
• The landscape is ever-changing!
59
The TOSI Rules – What’s new?
Merci / Thank you !
KATHERINE BORSELLINOLL.B, J.D., LL.M (FISC.)
Manager, Tax
T.514.934.3469
KBorsellino@Richter.ca
EMILIECHAMPAGNE-COUILLARDLL.B, D.E.S.S. (FISC.)
Associate, Tax
T.514.934.3440 – 4710
EChampagne-Couillard@Richter.ca
RICHTER