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. Are the dividends and taxable capital gains generated by Trust from its investments in shares listed on a designated stock exchange, and interest on debt obligations, subject to the tax on split income (TOSI) when distributed to Jeanne qua beneficiary?
CRA first found:
- 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,
- 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.
- subject to the point below, if the Trust instead carried on a business, then that business would be a related business respecting Jeanne (thereby subjecting the distributed interest to TOSI) if that business was managed by a child qua trustee or as stock broker retained by the trust and the “actively engaged on a regular basis” test was satisfied.
However, CRA then stated:
By virtue of subparagraph 120.4(1.1)(c)(ii), the amount that is Jeanne's income from property is deemed to be an excluded amount to the extent that the amount would have been an excluded amount in respect of an individual - Jean – who was, immediately before his death, Jeanne's spouse or common-law partner, if the amount were included in computing Jean's income for his last taxation year.
The portion of the Distribution with respect to the Interest would be an excluded amount in respect of Jean since it was not derived directly or indirectly from a related business in respect of Jean under subparagraph (e)(i) of the definition of "excluded amount" in subsection 120.4(1).