2018 STEP Roundtable Q.6 and Q.7 confirmed that the shares of a holding company (or of a company generating no business income) cannot qualify as excluded shares, whereas Examples 8 to 12 of CRA’s “Guidance on the application of the split income rules for adults” and the Department of Finance’s “Technical Backgrounder on Measures to Address Income Sprinkling” provide that such shares so qualify. What is CRA’s position? CRA stated:
The CRA's response to [Q.7 ] …was based on the assumption made in the statement of that question that the corporation had no business income. …
…[In its Guidance] … to demonstrate that the various exclusions were applicable … to entities carrying on a business whose principal purpose is to derive income from property, including interest, dividends, rents and royalties, such as investment management corporations (in Examples 8 and 12), the CRA assumed that these corporations maintained a sufficient level of activity such that their income could be considered as derived from such a business.
…[I]f the assumptions in Question 7 were modified so that the corporation carried on a business, the condition in subparagraph (a)(i) of the definition of “excluded shares" in subsection 120.4(1) would be satisfied.
…[I]f it is determined that a corporation does not carry on a business, and that that corporation pays a dividend to a specified individual, the amount of that dividend, provided it does not come directly or indirectly from a related business in respect of the specified individual, could be an excluded amount for the individual.
CRA went on to indicate where Mr. and Mrs. X (both age 35) respectively hold 90% and 10% of the voting common shares of Holdco, whose only source of revenue is dividends on its shares of Opco (wholly-owned by it), which Holdco dividends pro rata to Mr. and Mrs. X, with Mrs. X not being involved in the Opco business, her shares would not be “excluded shares” because “the total income of the corporation would come from another related business in respect of a specified individual (other than a business carried on by the holding corporation).”
However, if Holdco in its preceding year did not receive any dividends from Opco and it holds passive investments (acquired some time ago out of dividends received from Opco) which, in the previous year, generated interest and dividends of $100,000, a portion of which is now dividended pro rata to Mr. and Mrs. X, her shares are “excluded shares” if such $100,000 of income was “derived from the carrying on of a business the purpose of which is to earn interest income and dividends … notwithstanding the fact that the capital used in the acquisition by Holdco of the property used in carrying on its business was derived from dividends received from Opco.” As the dividend received by her would constitute an "excluded amount" under s. (g)(i) of the definition thereof, she would not be subject to split income tax thereon.