A specified individual (the “Individual”) receives a dividend paid out of corporate income that is derived, directly or indirectly, from a related business that was carried on by the Corporation in prior years, but which is no longer carried on by it. The Corporation did not derive, directly or indirectly, income from a related business in respect of the Individual other than the previously carried-on related business. Would the dividend be an “excluded amount” where:
(a) The business ceased in a prior year, and is no longer operated by anyone.
(b) The business was sold to an unrelated corporation in a prior year and is still active, but no source individual in respect of the dividend recipient was active in the business in the year of the dividend.
(c) The business was sold to an unrelated corporation in a prior year and is still active, but a source individual in respect of the dividend recipient was active in the business in the year of the dividend (for example, a former owner related to the Individual is employed by the new owners in the business, perhaps for a transitional period).
CRA responses
(a) In this scenario, the income was not derived from a related business for the year because the business was not carried out in the particular year, so that the dividend is an “excluded amount.”
(b) Although the business is still carried on, it was sold to an unrelated corporation in a prior year, so that there is no source individual actively engaged in the year of the dividend. Accordingly, the dividend received by the individual in that subsequent year would not be considered to have been derived from a related business for the year, so that the dividend would be an “excluded amount.” and would not be subject to TOSI.
It is assumed that the source individual would no longer retain any ownership in the business. If that is not the case, para. (c) of the definition of “related business” could apply.
(c) Where the business is sold to another unrelated corporation in a prior year yet still carried on, and the source individual is active in the business in the year of the dividend, then the business carried on by the unrelated corporation will constitute a related business for the year. Thus, the business carried on by the unrelated corporation will constitute a related business until the source individual is no longer actively engaged in the activities of the unrelated corporation.