Mr. A (who had a passive role in Opco’s business) died one year before Mrs. A (who had been actively involved for more than five years), and their surviving children (who were inactive) received a bequest of some shares of Opco directly from Mr. A, and then some from Mrs. A. Is each child entitled to the excluded business exemption in respect of all future dividends received from Opco?
CRA indicated that since Mr. A was not actively engaged in the activities of the business before his death, his shares bequested directly to the children would not satisfy s. 120.4(1.1)(b)(ii).
However, beginning in the taxation year in which the children inherit Mrs. A’s Opco shares as a consequence of her death, that deeming rule would apply, so that each child would be deemed to be actively engaged in the business of Opco throughout the five previous taxation years. Thus, any dividends received on any of their Opco shares (from the taxation year in which they inherited Mrs. A’s shares onward) would not be subject to the tax on split income, including the shares that they previously acquired as a result of Mr. A’s death.