Spouse A, and adult children of Spouse A and B, owned 80% and 20% of the Opco common shares, respectively. Spouse A, who was living separate and apart from Spouse B due to a breakdown in their marriage, transferred 20% of the Opco common shares to Spouse B such that para. (b) of the “excluded amount” definition in s. 120.4(1) now was satisfied. Although Spouse B was now deemed to not be related to Spouse A by virtue of s. 120.4(1.1)(e), the children continued to be “source individuals” in respect of Spouse B. Subsequent to such common share transfer, Spouse B’s common shares are converted on an Opco reorganization to Opco preference shares.
After noting that para. (b) referred only to property acquired by the individual (Spouse B) under a (marriage breakdown) transfer described in s. 160(4) and failed to refer to property substituted therefor, CRA stated:
The Preference Shares are substituted property to the Common Shares and were not acquired by Spouse B in a transfer described in subsection 160(4) of the Act. Accordingly, an amount received by Spouse B from the Preference Shares would not constitute an “excluded amount” to Spouse B under paragraph (b) … .
Consequently, TOSI could apply to Spouse B in respect of an amount derived from the Preference Shares if the applicable conditions were met and no other exclusions applied.