CRA noted that “[g]enerally, there is an incentive for the higher income spouse to elect under subsection 82(3) as the increase in the spousal tax credit from the election should exceed the tax payable on the dividend in the higher income spouse’s hands taking into account the dividend tax credit and the higher spousal tax credit [under s. 118(1)(a)] which can now also be claimed by that spouse after the election.”
In addressing the interaction between the s. 82(3) election and the tax on split income (“TOSI”) under s. 120.4, CRA stated:
Because subsection 82(3) deems all subject dividends to be “received” by the electing spouse while the TOSI applies to dividends received by a specified individual, based on the text, subsection 82(3) applies before the TOSI rules. When a taxpayer makes an election under subsection 82(3), all of the dividends received by his or her spouse or common-law partner from taxable Canadian corporations, are deemed to be received by the taxpayer for that year, and not by their spouse or common law partners. Thus, the electing spouse becomes the specified individual from the perspective of applying the TOSI rules. Where, because of their personal circumstances, the electing spouse is an Acceptable Recipient [benefiting from a TOSI exclusion] of the subject dividends, then such dividends will not be subject to the TOSI.
The Directorate provided three examples, including Example 3, under which the electing spouse is the higher earner in the couple, but not at the highest personal rate and holds 20% of the shares of Aco in which the other spouse (the “Recipient Spouse”) receiving the subject dividends holds 5% of the shares and “Brother” (who is the only one actively involved in Aco’s manufacturing business) holds the balance of 75%.
The Directorate indicated that although the dividends that the Electing Spouse is deemed by the s. 82(3) election to have received are not further deemed to be paid on the Aco shares actually held by the Electing Spouse, it nonetheless will consider the deemed dividend to have been received on the excluded shares of the Electing Spouse rather than on the 5% shareholding of the Recipient Spouse, so that the deemed dividends would not be subject to TOSI.
The Directorate also indicated:
[I]f shares held by an Electing Spouse were not excluded shares before the election, they will not become excluded shares after (i.e. an Electing Spouse who owns 6% of the votes and value of Opco, will not be deemed by the subsection 82(3) election to own the 5% of shares of Opco that are held by their lower income spouse). …
[T]he filing of the subsection 82(3) election is not inconsistent with the TOSI policy, and this view is not impacted by the ability to late file or amend a subsection 82(3) election.