Principales Questions: A family Trust (“Trust”) has sold its shares of the capital stock of a corporation (“Opco”) and has allocated the taxable portion of the resulting capital gain to Mr. X, Ms. X (Mr. X’s spouse) and their children (“Child X” and “Child Y”). The shares of the capital stock of Opco held by Trust qualified as small business corporation shares as defined in subsection 110.6(1) and the beneficiaries claimed the capital gains exemption with respect to the taxable capital gain allocated by Trust. Child X and Child Y are age 15 and 22, respectively. A holding company (“Holdco”) was incorporated and Trust, Mr. X, Ms. X, Child X and Child Y subscribed to, respectively, 50%, 20%, 20% 5% and 5% of the shares of the capital stock of Holdco with the proceeds of disposition received from the sale of the Opco shares. Ms. X, Child X and Child Y were not involved in Opco’s business. Holdco used the proceeds received from the issuance of its shares to purchase portfolio investments. The following year, Holdco earned $150,000 of passive income from its portfolio investments. Holdco intends to pay dividends to its shareholders ($50,000 to Trust, $20,000 to each of Mr. X and Ms. X, and $5,000 to each of Child X and Child Y). Trust intends to allocate the dividends received from Holdco to Ms. X, Child X and Child Y. A) Whether the dividends paid by Holdco to Mr. X, Ms. X’ Child X and, Child Y are subject to TOSI. B) Whether the allocation of the dividends by Trust is subject to TOSI.
Position Adoptée: The taxable capital gains distributed by Trust would be excluded amounts for Mr. X, Ms. X, Child X and Child Y under paragraph (d) of the definition of the expression “excluded amount”. A) Because Child X is minor, dividends paid by Holdco would be added to his split income and he would be subject to TOSI. If Holdco does not carry on a business, the dividend received by Mr. X, Ms. X and Child Y would not be derived, directly or indirectly, from a related business and would be an excluded amount for these three individuals. If Holdco carries on a business, Holdco would be a related business in respect of Mr. X, Ms. X and Child Y as Mr. X and Ms. X would both meet the ownership test in respect of Holdco for the purposes of the definition “excluded shares”. Consequently, dividends paid by Holdco would be excluded amounts for Mr. X and Ms. X as their shares held in the capital stock of Holdco would qualify as excluded shares. The dividends paid by Holdco could be an excluded amount for Child Y to the extent it does not exceed the safe harbour capital return exclusion. B) Because Child X is minor, the Trust’s distribution received would be added to his split income and he would be subject to TOSI. If Holdco does not carry on a business, the Trust’s distribution received by Ms. X and Child Y would not be derived, directly or indirectly, from a related business and would be an excluded amount for these two individuals. If Holdco carries on a business, the Trust’s distribution could be an excluded amount in respect of Ms. X if it is a reasonable return in respect of her. The distribution could be an excluded amount in respect of Child Y to the extent it does not exceed the safe harbour capital return exclusion.
Raisons: In accordance with the legislation.