Jean on his decease left proceeds of an insurance policy and non-registered investments (which had been acquired by him out of accumulated savings) under a trust (“Trust”) for the exclusive benefit of his surviving spouse (“Jeanne,” also a Canadian resident), and with two of their children as trustees. Is the income generated by Trust and distributed to Jeanne subject to the tax on split income where the Trust investments are managed by: the two trustees; an independent third party; or a child of Jean and Jeanne who is not a Trust beneficiary but is a stock broker?
After assuming that Trust's investment income consists of taxable dividends on shares listed on a designated stock exchange ("Dividends"), taxable capital gains from the disposition of such shares ("Capital Gains") and interest on debt obligations ("Interest"), and after finding that the distributed Dividends and Capital Gains were not split income by virtue of the ss. (a)(i), (c)(ii)(A) and (e)(ii)(A) exclusions in the “split income” definition, CRA went on to consider whether the distributed Interest would be split income to Jeanne in the absence of the exclusion in s. 120.4(1.1)(c)(ii). On this basis, CRA first found that the distributed Interest would not constitute income from a “related business” (as per s. (a)(ii) of the definition) if Trust did not carry on business. After noting that Jeanne’s children were source individuals in respect of Jeanne, CRA went on to state that:
If it were … established that Trust is carrying on a business and that, under any of the scenarios contemplated in the question as stated, a source individual in respect of Jeanne is actively engaged on a regular basis in the activities of Trust related to earning income from the business, then the portion of the Distribution related to the Interest would come, directly or indirectly, from a related business in respect of Jeanne for the purposes of the application of clause (c)(ii)(C) of the definition of "split income" in subsection 120.4(1).
In the final version of its answer, CRA further noted:
Even assuming that Jean derived income from a business from these properties, this business could not qualify as a related business in relation to Jean.
Indeed, by virtue of subparagraph (a)(i) of the definition of "related business" in subsection 120.4(1), the business carried on by an individual must be carried out by a source individual in respect of the specified individual. Since Jean cannot be a source individual in relation to himself, the hypothetical business could not be a related business in respect of Jean.