Will the s. 120.4(1.1)(c) exclusion apply where the deceased spouse qualified under the “excluded shares” exception based on direct ownership of the shares, and the surviving spouse holds the shares through a holding company or trust?
CRA referred to the example of individual A, the deceased spouse of a specified individual, owning excluded shares of Canco throughout A’s last taxation year before A’s death. The specified individual is a beneficiary of a Canadian-resident trust, which acquired Canco shares during A’s lifetime. Canco carries on a related business with respect to A and the specified individual.
Canco pays a dividend to the trust, which is then distributed by it to the specified individual. The exclusion in s. 120.4(1.1)(c)(ii) will apply if the dividend would have been an excluded amount of A had it been included in computing A’s income for A’s last taxation year before death.
CRA considered that the ownership requirement in para. (b) of “excluded shares,” for this purpose, is based on the actual ownership of the shares by the deceased spouse in the relevant year.
Given that A owned shares of Canco throughout A’s last taxation year before death, those shares satisfied the requirements for being excluded shares during that period, and CRA considers that the amount of the dividend that was notionally included in A’s income to have been income from those shares, so that such dividend would have been an excluded amount in respect of A had it been included in A’s income in A’s last taxation year, because it would have been income from excluded shares.
The dividend in that case should be deemed to be an excluded amount in respect of the specified individual under s. 120.4(1.1)(c)(ii), and a similar analysis would also apply in respect of the situation in s. 120.4(1.1)(c)(i), which is where the spouse or common-law partner was 65 years or older in the year.