The TOSI rules don’t just apply to dividends from Canadian private corporations. The rules can apply to dividends from foreign private corporations as well, and the tax results are potentially horrendous.

Stan Shadrin, Manu Kakkar and Alex Ghani, “FAPI and TOSI Overlap: 107 Percent Tax Is Not Fair” (January 2020) 20:1 Tax for the Owner-Manager

In a technical interpretation (TI 2019-0814181E5, August 19, 2019), the CRA confirmed that the five-year test to qualify for the “excluded business” exception under the TOSI (tax on split income) rules should take into account all taxation years in which a taxpayer is involved in a business, regardless of whether the business was previously carried on in another form.

What happens where Opco A and Opco B amalgamate, Amalco carries on the businesses carried on by each of the predecessors but a spouse (“spouse B”) was involved in only one of the businesses?

In that case, Amalco must maintain separate books and records for each business, and the taxpayer must maintain documentation adequate to allow the tracing of funds from each business to the payment of dividends to determine whether the dividend is an excluded amount for spouse B.

Good luck with that.

Dino Infanti, “The ‘Excluded Business’ Exception to TOSI: Reorganized Businesses” (January 2020) 20:1 Tax for the Owner-Manager

The CRA believes that taxable capital gains are “income” for the purposes of paragraph (c) of the “excluded shares” definition in the TOSI rules. The CRA also states that the gains in question should be computed on a gross basis, without deducting allowable capital losses. Dino Infanti, “Taxable Capital Gains Are Income for TOSI “Excluded Shares” Purposes” (Oct 2019) 19:4 Tax for the Owner-Manager, commenting on CRA technical interpretation 2019-0802331E5 (May 24, 2019).

An employee who works in a business on a full-time basis (ie more than an average of 20 hours per week) for five or more years will not be subject to TOSI even where the years occurred before the TOSI rules came into effect and even where the employee was not related to the source individual at the time the work was done. CRA technical interpretation 2018-0783741E5, February 27, 2019. Georgina Tollstam “Five-Year Test in TOSI’s ‘Excluded Business’ Definition” Canadian Tax Highlights 27:6 (June 2019)

Mr X owns the voting shares of Holdco that owns a rental property. His two kids own non-voting shares that on which Holdco pays dividends. Does the TOSI apply to dividends paid to the kids?

Is the rental operation a “business”? The law is unclear on what constitutes a business. A low level of activity might entail a finding that Holdco carried on a business, which would engage the TOSI rules. See Canadian Marconi v R, 1986 CanLII 42 (SCC), Ollenberger v R, 2013 FCA 74 and Spire Freezers Ltd. v R, 2001 SCC 11.

Balaji Katlai, “TOSI and Dividends from Rental Income: New Rules, Old Problems” Tax for the Owner Manager 19:3 (July 2019)

The ability to use 15(2) and 20(1)(j) for income averaging has been impaired by the TOSI rules. What’s worse, if an individual includes an amount in income under 15(2) that is split income, he or she will not be entitled to a deduction under 20(1)(j) upon repaying the loan.

Although individual taxpayers who are already paying tax at the highest marginal rate may overlook the TOSI regime, this outcome suggests that TOSI may affect high-rate taxpayers as well. As long as one’s shareholder loan could be caught as split income, whether a person is already paying the high rate of tax is irrelevant—the paragraph 20(1)(j) deduction may not be available if a strict reading of the Act is enforced.

Martin Lee, “Shareholder Loans: TOSI Prevents Deduction on Repayment” Canadian Tax Focus 9:2 (May 2019)

In technical interpretation 2018-0777361E5 (November 7, 2018), the CRA considered whether shares of a private corporation (Investco) were “excluded shares”. The parent who held voting preference shares had died. The preference shares represented more than 10% of all votes and value in the issued shares of the corporation. The deceased’s three children, all of whom were over the age of 25, held the Common Shares of Investco. Each child’s Common Shares represented more than 10% of the votes and value of the issued shares. Investco carried on an investment “business”, the capital of which was derived from a business that it had carried on and sold decades previously. Investco proposed to wind-up, which would result in the redemption of its issued shares and the deemed payment of dividends to the shareholders of the corporation.

The CRA took the position that the Common Shares were excluded shares but not the freeze shares because the ownership test in respect of those shares had not been met (presumably because the beneficiaries of the estate were not the owners of the shares, the estate was).

Would the result have been different if the estate had distributed the freeze shares to the children before the winding-up?

See Marlene Cepparo, “Estate’s Deemed Dividends: Not in “Excluded Shares” TOSI Exception” Canadian Tax Hightlights 27:2 (February 2019).

In Kathryn Walker, “The Services Carve-Out from TOSI” Canadian Tax Focus 4:4 (May 2018), the author considers the meaning of business income from the “provision of services” in the definition of excluded shares in s 120.4(1). She notes that the Income Tax Act uses the phrase in only a few other places and provides no guidance on its meaning. The few cases that refer to the phrase do not provide any guidance either. The author speculates about the meaning to be ascribed to the phrase and concludes that “[t]his review of what “provision of services” might mean shows that large sections of the economy could be vulnerable to the new TOSI.”

Let’s see what the harassed tax adviser (or front-line CRA auditor) must do to answer basic client questions about the new tax-on-split-income (TOSI) rules. Continue reading →