The TOSI Rules - PDF document

The TOSI Rules –What’s new?Règles
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 LLPMontrealNovember 16, 20182The 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 corpor

ation, partnership or trust (“Split i
ation, 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 denied3The 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•DefinitionsMODIFIED / EXPANDED DEFINITIONS MODIFIÉES / ÉTENDUESNEW / NOUVELLES DEFINITIONS •Excluded amount / Montante

xclu•Specified individual / Particu
xclu•Specified individual / Particulierdéterminé•Split income / Revenufractionné•Arm’s length capital / Capital indépendant•Excluded business / Entrepriseexclue•Excluded shares / Actions exclues•Reasonable return / Rendementraisonnable•Related business / Entrepriseliée•Safe harbor capital return / Rendementexonéré•Source individual / Particuliersource4The TOSI Rules –What’s new?TOSI –Application•Specified individual/ Particulierdéterminé−Individual (other than a trust) who i

s a resident in Canada (at the end of th
s 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 businessor the rental of property (where a related p

erson is actively engaged on a regular
erson 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 businessor 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 trust5The TOSI Rules –What’s new?TOSI –Application•Related business / Entrepriseliée−Business carried on by a source individual

−Business carried on by a partnership
−Business carried on by a partnership, corporation or trust if a source individualis 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 corporation6The TOSI Rules –What’s new?TOSI –Application•Source indiv

idual / Particulier source−Individua
idual / 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 denied7The TOSI Rules –What’s new?TOSI•Exceptions−Income, capital gain or profit to the extent that such amount

s qualify as an excluded amount−Inh
s qualify as an excluded amount−Inheritance−Source individual who is 65 +8The TOSI Rules –What’s new?ExampleSettlor: 3rdpartyTrustees: Founder3rdparty non-settlor, non-beneficiaryBeneficiaries: •Founder(source individualand specifiedindividual)•Spouse(specifiedindividual)•Child 1 (25 +) -full time (source individualand specifiedindividual)•Child 2 (18-24) -part time (specifiedindividual)•Child 3 (minor) (specifiedindividual)•Corporations controlled by Founder9T

he TOSI Rules –What’s new?During
he TOSI Rules –What’s new?During Operations –Employment Income•TOSI does not applyto 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)10The TOSI Rules –What’s new?During Operations –Dividend IncomeExcluded Amount –Non-Related Business / Entreprisenon liée(120.4(1)(e)(i)) SPECIFIED INDIVIDUALCONDITIONS OF APPLICATIONXFounderXSpou

seXChild 1 (adult, 25+)XChild 2 (adu
seXChild 1 (adult, 25+)XChild 2 (adult, 18-24)XChild 3 (minor)� 17 yearsoldxNot 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 individualis 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 corporation11The TOSI Rules –What’s new?During Operations –Dividend Incom

eExcluded Amount –Excluded Business
eExcluded Amount –Excluded Business [for the year] / Entreprise exclue(120.4(1)(e)(ii)) SPECIFIED INDIVIDUALCONDITIONS OF APPLICATION✓FounderXSpouse✓Child 1 (25+)~Child 2 (18-24)XChild 3 (minor)� 17 yearsold✓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
during the portion of the year in which the business operates−Any 5 prior taxation years of the specified individual12The TOSI Rules –What’s new?During Operations –Dividend IncomeExcluded Amount –Excluded shares / Actions exclues (120.4(1)(g)(i)) SPECIFIEDINDIVIDUALCONDITIONS OF APPLICATION~FounderXSpouseXChild 1 (25+)XChild 2 (18-24)XChild 3 (minor)� 24 years oldShares owned by the specified individual if:a)(i) Less than 90% of the business income of the corporation was from the provision of servi

ces(ii) the corporation is not a profes
ces(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 corporation13The TOSI Rules –What’s new?During Operations –Dividend IncomeExcluded Amount –Safe Harbour Capital Return / Rendement exonéré

(120.4(1)(f)(i)) SPECIFIED INDIVIDUALC
(120.4(1)(f)(i)) SPECIFIED INDIVIDUALCONDITIONS OF APPLICATIONXFounderXSpouseXChild 1 (25+)~Child 2 (18-24)XChild 3 (minor)18-24 years oldReturn up to the highest prescribed rate of interest in effect for a quarter in the year •2% as of April 2018FMV 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 apply14The TOSI Ru
harbour: TOSI does apply14The TOSI Rules –What’s new?During Operations –Dividend IncomeExcluded Amount –Reasonable Return / Rendement raisonnable (120.4(1)(g)(ii)) SPECIFIED INDIVIDUALCONDITIONS OF APPLICATION✓FounderXSpouse✓Child 1 (25+)XChild 2 (18-24)XChild 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 businessa)

Work performed b)Property contributed
Work performed b)Property contributedc)Risks assumedd)Historical paymentse)Other relevant factors•Reasonable amount: TOSI does not apply•Unreasonable amount: TOSI does apply15The TOSI Rules –What’s new?During Operations –Dividend IncomeExcluded Amount –Reasonable Return Arm’s Length Capital / Rendement raisonnable –capital indépendant (120.4(1)(f)(ii)) SPECIFIED INDIVIDUALCONDITIONS OF APPLICATIONXFounderXSpouseXChild 1 (25+)XChild 2 (18-24)XChild 3 (minor)18-24 years oldReasonable ReturnLi

mited to contributions of arm’s lengt
mited to contributions of arm’s length capital, being property contributed by the specified individualthat 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 apply16The TOSI Rules –What’s new?Upon the Sale of Opco and/or HoldcoExcluded Amount •Capital gain realized on

the disposition of shares that qualify a
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 business17The TOSI Rules –What’s new?Upon the Sale of Opco and/or HoldcoExcluded Amount –QFFPor 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−Preserve

s the availability of the lifetime capit
s 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 LCGEwill be available to minors if there is a disposition to an arm’s length party−The LCGEwill be available to minors if a capital gain arises as a consequence of death18The TOSI Rules –What’s

new?Upon the Breakdown of a Marriage or
new?Upon the Breakdown of a Marriage or Common-law PartnershipExcluded Amount –The Break-up Exception (120.4(1)(b)) •No agelimitation•Propertyacquiredby a spousefollowingthe breakdown of a marriageor common-lawpartnership•The incomederivedfrom saidpropertywillnot besubjectto TOSI−Decree, orderor judgementof a competenttribunal or a writtenseparationagreement; and−The taxpayerand theirspouseor common-lawpartnerwereseparatedand living apartas a resultof the breakdown of

theirmarriageor common-lawpartners
theirmarriageor common-lawpartnership19The TOSI Rules –What’s new?ExampleSettlor: 3rdpartyTrustees: Founder3rdparty non-settlor, non-beneficiaryBeneficiaries: •Founder(source individualand specifiedindividual)•Spouse(specifiedindividual)•Child 1 (25 +) -full time (source individualand specifiedindividual)•Child 2 (18-24) -part time (specifiedindividual)•Child 3 (minor) (specifiedindividual)•Corporations controlled by Founder20The TOSI Rules –What’s new?Upon

the Retirement of Founder (+65 years o
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 Founder21The TOSI Rules –What’s new?Upon the Retirement of Founder (+65 years old)•Child 1 (25+) (see previous slides)â€

¢Excluded business•Reasonable retur
¢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 applicable22The TOSI Rules –What’s new?Upon the Death of FounderExcluded Amount –Capital gains on death (120.4(1)(c)) •Founder•No age limitation•Taxable capital gains realized upon death are not subject to TOSI23The TOSI Rules –What’s new?Upon the Death of FounderExcluded Amount –Inheritan

ce (120.4(1)(a)) SPECIFIED INDIVUDAL
ce (120.4(1)(a)) SPECIFIED INDIVUDAL (HEIRS)EXCLUDED AMOUNT –INHERITANCE EXCEPTIONSChildren25years•Income from property inherited from a parent Others25years•Income from property inherited from anyoneif full-time student enrolled in a post-secondary institution or eligible for the disability tax credit24The TOSI Rules –What’s new?Upon the Death of FounderOther Inheritance Exceptions –Continuity RulesSPECIFIED INDIVIDUAL (HEIRS)EXCLUDED AMOUNT –INHERITANCE EXCEPTIONSChildren � 17 yearsOthe

rs � 17 years(120.4(1.1)(b)) â€
rs � 17 years(120.4(1.1)(b)) •Continuityrulefor inheritedproperty−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 yearIncome earned from inherited property will not be subject to TOSI25The TOSI Rules –What’s new?Upon the Death of Found

erOther Inheritance Exceptions –Con
erOther Inheritance Exceptions –Continuity RulesSPECIFIED INDIVIDUAL (HEIRS)EXCLUDED AMOUNT –INHERITANCE EXCEPTIONSSpouse (120.4(1.1)(c)(ii))•Continuityrulefor inheritedproperty−Income earned from inherited property will qualify as an excluded amount for the spouse if it was an excluded amount for the deceased26The TOSI Rules –What’s new?Recent Technical Interpretations27The TOSI Rules –What’s new?8 May 2018 Roundtable, 2018-0745871C6 –CALU Conference Question 6 –Tax on Split Income•Exc

luded Amount –Excluded Shares•Qu
luded 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 re

lated business (other than a business c
lated business (other than a business carried on by the holding corporation)28The 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 provis
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•UNLESSthe income can reasonably be considered to be necessary but incidental to the provision of the services29The 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 o
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 businessof the specified individualor if the income constitutes a reasonable return.•However, CRA indicates that “the most appropriate test” to determine the non-application of TO

SI should be based on the general test o
SI should be based on the general test of whether the amount received is a reasonable return.30The 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 incometo test•(Services Income) .9 (Business Income)

•If both services income and busines
•If both services income and business income = zero, the condition has been failed.31The TOSI Rules –What’s new?October 2018 –APFF Roundtable –Q. 9 –Excluded sharesQuestion 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 Holdc
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)32The TOSI Rules –What’s new?October 2018 –APFF Roundtable –Q. 9 –Excluded shares•Question 9(b) and (c)33The TOSI Rules –What’s new?October 2018 –APFF Roundtable –Q. 9 –Excluded sharesQuestion 9(b)•Holdco’s only revenue in

the year derives from dividends from Opc
the year derives from dividends from Opco•Mrs. X wouldnotownexcludedsharesbecauseall or substantiallyall of Holdco’sincomederivesfroma relatedbusiness(Opco)•Again, CRA states that, althoughthe excludedsharesexception doesnot apply, anotherexclusion mayapply34The TOSI Rules –What’s new?October 2018 –APFF Roundtable –Q. 9 –Excluded sharesQuestion 9(c)•Holdcoownspassive investmentsacquiredmanyyearsagousingdividendsreceivedfrom Opco•If Holdcocarries on a business wh

ichearnsincomederivedfrom property
ichearnsincomederivedfrom 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 120.435The TOSI Rules –

What’s new?October 2018 –APFF Ro
What’s new?October 2018 –APFF Roundtable –Q. 10 –Discretionary trust interests and s. 120.4 “related business” valuation•Propertyreferred 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
a discretionary trust is a question of valuation36The TOSI Rules –What’s new?October 2018 –APFF Roundtable –Q. 11 –Tracing dividends paid by Holdco to stock portfolio rather than related businessC/SP/S37The 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 i

n order to determine which funds are use
n 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 individualwho 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 apply38The TOSI Rules –What’s new

?October 2018 –APFF Roundtable –
?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 exchang
•listed on a designated stock exchange, or •of a mutual fund corporation •CRA will review the application of various provisions39The TOSI Rules –What’s new?October 2018 –APFF Roundtable –Q. 13 –Split income tax and distribution of reinvested capital gainPortfolio generated$150,000 passive income. Holdcowillpaya $100,000 dividendon a prorata basis (directlyto individualsand indirectlyvia the Trust)40The TOSI Rules –What’s new?October 2018 –APFF Roundtable –Q. 13 –Split income tax

and distribution of reinvested capital g
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?41The TOSI Rules –What’s new?October 201

8 –APFF Roundtable –Q. 13 –S
8 –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 businessexception)•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 ex
•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 distribution42The 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 ent

ities that carry on a business whose pri
ities 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 shares43The TOSI Rules –What’s new?October 2018 –APFF Roundtable (Financial strategies and instruments) –Q. 3 –Testamentary trust and TOSIFactsâ

€¢Life insurance proceeds and stock mar
€¢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 busi

ness? •Dividends and capital gains
ness? •Dividends and capital gains: derived from public corporations; therefore, not split incomeand TOSI does not apply•Interest: split income ? Derived directly or indirectly from a related business? If so, do any inheritance/ continuity rules apply?44The 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 Q

uestion•Under different management s
uestion•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? •Doesthe 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 amountfor the Spouse (since the income would have b

een an excluded amountto the deceased
een an excluded amountto the deceased [120.4(1.1)c)(ii)])45The 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)46The TOSI Rules –What’s new?May 25, 2018 –2018-0761601E5 –Tax on Split Income•General comments provided related to the definition of excluded sharesand e

xcluded business47The TOSI Rules –
xcluded business47The TOSI Rules –What’s new?July 6, 2018 –2018-0759521E5 –Tax on split income and preferred beneficiary•CRA confirms that the definition of split incomeincludes trust distributions but notpreferred beneficiary amount under s. 104(14)48The 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 multipleclasses of shares sho

uld be considered. 49The TOSI Rules
uld be considered. 49The 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 deta

ils.50The TOSI Rules –What’s new
ils.50The TOSI Rules –What’s new?November 2, 2018 –2018-0771861E5 –TOSI and the meaning of “derived directly or indirectly from a related business”•FactsWill dividend income be considered to derive directly or indirectly from a related business in the following scenarios:51The 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 corporati

ons to Mrs:•If Investco does not c
ons to Mrs:•If Investco does not carry on a business : non-related business exception would apply and, therefore, TOSI would not apply•If Investco doescarry on a business: non-related business exception would notapply and we would need to determine if anotherexception could apply.52The 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
:•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
of Opco or Investco –non-related business exception applies•If Investco does carry on a business: non-related business exception would notapply and we would need to determine if another exception could apply.53The 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 change54

The TOSI Rules –What’s new?Novem
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.55The 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’sbusiness ?•CRA would consider the fact that both Mr. and Ms. risked their family home by mortg

aging it in order to provide the Loan to
aging 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 56The TOSI Rules –What’s new?November 2, 2018 –2018-0771851E5 –Meaning of “reasonable return”•Q.2: Can Mr. look at the undistribut

ed retained earnings of Xcoas capital
ed retained earnings of Xcoas capital that is at risk for purposes of this exception?•The undistributed retained earnings of Xcodo 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 Xco57The TOSI Rules –What’s new?Conclusion•TOSI seems to apply as a general rule, subject to various exceptions•The exceptions are notmutually exclusive•Income splitting opportunities are limite

d but not impossible-Depends on the ag
d 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 business58The TOSI Rules –What’s new?Conclusion•Implementing a freeze −Remains an important estate planning measure for the freezor

−Remains an important tool in the in
−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 LCGEremains•The landscape is ever-changing!59The TOSI Rules –What’s new?Merci / Thank you !KATHERINE BORSELLINOLL.B, J.D., LL.M (FISC.)Manager, TaxT.514.934.3469KBorsellino@Richter.caEMILIECHAMPAGNE-COUILLARDLL.B, D.E.S.S. (FISC.)Associate, TaxT.514.934.3440 –4710