Mrs. A has been actively engaged in the (services) business of Opco for at least five years, whereas Mr. A, the other shareholder, had not been so engaged. Opco shares, which were bequeathed to Mr. A under Mrs. A’s will passed, in turn, on his death to his children. Can the children rely on s. 120.4(1.1)(b)(ii)?
CRA indicated that Mr. A. would be deemed to have been actively engaged in the activities of Opco’s business throughout the five previous taxation years for purposes of the excluded business definition, for all years starting with the year in which the Opco shares were inherited. Furthermore, the effect of a previous application of s. 120.4(1.1)(b)(ii) could extend to a subsequent acquisition of property as a consequence of the death of another individual. Thus, when the children inherited Mr. A’s Opco shares as a consequence of his subsequent death, s. 120.4(1.1)(b)(ii) would deem each child to be actively engaged in the activities of the business for five prior taxation years, because Mr. A. was also deemed by that same provision to have satisfied that requirement. Therefore, any dividends arising on any of the shares of Opco owned by the children, for any taxation year starting with the year in which they inherited the Opco shares, would not be subject to the tax on split income.