A family trust (“Trust”) distributed the taxable portion of its gain on the sale of qualified small business corporation shares (of Opco) to its beneficiaries (Mr. and Mrs. X, and their children, Child X and Y, aged 15 and 22) who claimed the s. 110.6 deduction. The Trust and its beneficiaries then used their sales proceeds to subscribe for the shares of a newly-incorporated holding company (Holdco): Trust – 50% of the Holdco shares; Mr. and Mrs. X – 20% each; and Child X and Y – 5% each). Holdco generated $150,000 from investing these funds in the stock market and paid a $100,000 dividend pro rata to its shareholders with Trust, in turn, distributing its $50,000 dividend to Mrs. X and Child X and Y.
Are the dividends paid by Holdco to Mr. and Mrs. X and Child X and Y, and distributed by Trust to the latter three subject to split income tax? CRA indicated:
- The dividend paid by Holdco to Child X clearly would be added to the child’s split income given the age of under 17.
- If it were determined that Holdco did not carry on a business, then the dividends received from Holdco would be “excluded amounts” for Mr. X, Mrs. X and Child Y under s. (e)(i) thereof.
- If Holdco instead was carrying on a business and, thus, a related business respecting Mr. X, Mrs. X and Child Y, the shares of Mr. and Mrs. X would be excluded shares given that they had the greater than 10% shareholdings described in s. (b) of the excluded share definition, under s. (a) of that definition Holdco’s income was from property, and under s. (c), all or substantially all of Holdco’s income was from its own business. However, Child Y would not hold excluded shares given a shareholding of only 5%.
- A similar analysis applied to the distribution by Trust.