Principal Issues: Whether an individual is precluded from claiming a deduction under paragraph 20(1)(ww) in respect of a taxable capital gain that is included in split income.
Position: No. The CRA will not challenge a deduction under paragraph 20(1)(ww) for any portion of an individual's split income that relates to the taxable capital gain.
2023 STEP CRA Roundtable – June 20, 2023
QUESTION 9. TOSI and Deduction Under Paragraph 20(1)(ww)
Where an individual has split income in a particular taxation year, that individual is subject to the tax on split income (“TOSI”) under subsection 120.4(2). However, the amount of split income is also included in the individual’s income under Division B of Part I of the Income Tax Act (Canada) (the “Act”). The mechanism for avoiding the double taxation of split income is found in paragraph 20(1)(ww) of the Act which provides a deduction, in computing an individual’s income from a business or property, for an amount equal to the amount of the individual’s split income.
Suppose an individual recognizes a capital gain of $200,000 in a particular taxation year, of which the taxable capital gain of $100,000 is included in the individual’s split income. Suppose the same individual has realized a capital loss of $200,000 in the same taxation year from an unrelated transaction. Does the CRA agree that, in these circumstances, the individual would not be precluded from claiming a deduction under paragraph 20(1)(ww) for the taxable capital gain included in split income?
CRA Response
Where an individual has split income in a particular taxation year, such income is subject to TOSI. Specifically, subsection 120.4(2) provides that there shall be added to a specified individual’s tax payable under Part I for a taxation year the highest individual percentage for the year multiplied by the individual’s split income for the year. The “split income” of an individual is defined in subsection 120.4(1) and includes certain taxable capital gains.
The purpose of paragraph 20(1)(ww), as indicated in the Department of Finance Explanatory Notes, is to ensure that an individual’s split income is excluded from the individual’s income that is otherwise subject to tax. Accordingly, in the circumstances described above, the CRA would not challenge a deduction under paragraph 20(1)(ww) for any portion of an individual’s split income that relates to the taxable capital gain.
Tania Ng
2023-096130