A professional corporation (PC1), whose voting shares have been held by Dr. A (a physician) and whose non-voting participating shares have been held equally by Dr. A and Spouse A (who has had no involvement in the practice) has applied earnings to build up a large portfolio of publicly-traded securities, which is managed by a financial institution with little involvement of the couple. However, on December 30 of Year 1, PC1 ceased carrying on its medical services business, on December 31, Spouse A acquired 50% of Dr. A’s voting shares of PC1 for their fair market value, and received dividends on her non-voting common shares. On January 1 of Year 2, a new professional corporation (PC2) was formed with the same ownership as PC1 several days earlier and it commenced to carry on the medical practice. Would dividends paid on Spouse A’s shares of PC1 after Year 1 be subject to the tax on spit income.
After finding that technically Spouse A’s shares were excluded shares in Year 2, but not thereafter, CRA stated that "any dividend paid by PC1 to Spouse A would be considered to be derived directly or indirectly from a 'related business' carried on by PC2 (and not PC1) in Year 2 and subsequent years," given that the "derived directly or indirectly" phrase was to be construed broadly.