Many years ago, three Canadian-resident brothers pooled their savings and incorporated TDH, whose only class of shares is owned equally by them and which owns three rental properties of equal value. The brothers live primarily on the dividend income on the shares and have never been active in managing TDH, which instead is managed by an arm’s length property management company. The initial capital was repaid many years ago.
Are such dividends subject to TOSI, and would the answer change if there were a butterfly split-up of TDH between three respective new holding companies for the respective brothers, who would continue to receive dividends?
CRA indicated that, where the level of activity in a corporation was enough to constitute a business, and the other conditions in the excluded share definition were met, those shares would be excluded shares. Conversely, if it was determined that TDH did not carry on a business, the excluded share exception would not apply – but s. (e)(i) of the definition of excluded amount would apply to prevent the taxable dividend from being subject to TOSI, provided the dividends are not derived directly or indirectly from a related business in respect of the individual for the year.
The analysis would be similar following any split-up butterfly.