A spousal trust for Jocelyne (“Trust”) holds five commercial rental properties (generating $250,000 in annual rents, which had been managed by her deceased husband). Is the income generated by Trust and distributed to Jeanne subject to the tax on split income where the Trust investments are managed by Jocelyne’s son Julien?
CRA noted that the net rental income distributed to Jocelyne might come within s. (c)(ii)(D) of the definition of "split income" depending on the level of involvement of Julien, but went on to indicate that even if this were the case, the exclusion in s. 120.4(1.1)(c)(ii) would appear to apply:
By virtue of subparagraph 120.4(1.1)(c)(ii), the amount that is Jocelyne'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 - Joseph – who was, immediately before his death, Jocelyne's spouse or common-law partner, if the amount were included in computing Joseph's income for his last taxation year.
The Distribution would have been an excluded amount in respect of Joseph since it was not derived directly or indirectly from a related business in respect of Joseph by virtue of subparagraph (e)(i) of the definition of "excluded amount" in subsection 120.4(1).
Since Joseph owned the commercial rental properties directly, and even under the assumption that Joseph derived income from a business, that business could not be classified as a related business.
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 on by a source individual in respect of the specified individual. Since Joseph could not be a source individual in respect of himself, the hypothetical business could not be a related business in respect of Joseph.