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 →