Property Received as a Consequence of Death Exception to Tax on Split Income (“TOSI”)
In July 2017 the Liberal Government Finance Minister announced a series of very significant changes affecting the taxation of private corporations. One of these was the tax on split income or TOSI rules which generally were intended to stop income splitting using private corporations. The rules have been subject to a number of revisions, are very complicated and are still subject a number of questions.
Stuart Bollefer is admitted to the Bar in the Province of Ontario and is an experienced tax lawyer with the law firm Aird & Berlis LLP. He has presented this topic at the Ontario Tax Conference held in Toronto, Ontario, and discussed these rules in detail.
The purpose of this short post is to briefly describe the ambit of the rules and some of the available exceptions, but is not intended to be a substitute for advice from a qualified tax specialist.
As part of the Ontario Tax Conference presentation, Stuart Bollefer also prepared an 80 page paper which can be accessed by members of the Canadian Tax Foundation. 
Essentially, the TOSI rules will subject any type of distribution from a corporation to top rate tax where the payment is made as a dividend on shares owned by an individual or interest paid on debt advanced by the individual, where the recipient of the dividend or interest is related to a person who either owns 10% or more of the shares of the corporation or is active in the business of the corporation. The TOSI rules can also apply to certain capital gains realized on the sale of shares of a private corporation.  There are many additional supplementary rules that apply.
In order to avoid the application of TOSI, it is necessary to find an applicable exception.  One very useful exception discussed by Stuart Bollefer is the “Property Received as a Consequence of Death Exception”.  This exception is described below. 
Property Received as a Consequence of Death
This exception is found in paragraph (a) of the excluded amount definition, This exception is applicable to the application of TOSI in the circumstances where a person has not attained 24 years of age in the previous year (25 in the current year) and the property in question was acquired by or for the benefit of the individual as a consequence of the death of a person who is:
·    a parent of the individual; or
·    any person, if the legatee is
o  enrolled as a full time student during the year at a post-secondary education institution (as defined in subsection 146.1(1)), or
o  an individual in respect of whom an amount may be deducted under the disability deduction provision of section 118.3.
A few things should be noted about this exception. First of all, though it generally applies to inheritances, it will not apply if the person is 25 years of age or older. Therefore, this means that a minor or younger person could inherit shares of a private corporation and not be subject to TOSI under this exception, but at the age of 25, TOSI could begin to apply unless another exception is applicable.
Secondly, the exception only applies if the individual acquires the shares as “a consequence of the death of a person”. This would normally mean that the shares or other assets would devolve upon the person by a testamentary disposition, that is, by virtue of a provision contained in the deceased’s Will or as a result of an intestacy. It is not clear whether this provision would apply if, for example, the assets were transferred to the person from an alter ego or spousal trust of the deceased person or perhaps more remotely, from a family trust which holds the asset. It is not completely clear whether such a transfer would be as a result of a consequence of the death of say a parent. CRA has opined in some instances that if the language in the alter ego trust is properly drafted, such a transfer could be viewed as a transfer as a consequence of death.[1]
It is also interesting that the provision applies if the property is acquired “for the benefit of” a person as a consequence of the death. The “for the benefit” language suggests that the property does not need to be distributed outright to the beneficiary, but could be held in trust for the benefit of the beneficiary. This would suggest that distributions from an estate to a trust benefitting a person who has not attained 25 years of age could qualify as an excluded amount. It is not clear whether the trust would need to be a testamentary trust or whether an inter vivos trust established before the death of the testator would suffice.
 
The rules are complicated and good tax advice should be sought in navigating these rules.  Stuart Bollefer will be discussing further exceptions in subsequent posts.
 


[1] CRA Technical Interpretation No. 2000-017625 (November 21, 2000), CRA Ruling No. 2000-0039395 (October 17, 2000), CRA Ruling No. 2009-0350491R3 (January 1, 2010), CRA Ruling No. 2005-0155371R3 (January 1, 2005), CRA Ruling No. 2004-0060271R3 (January 1, 2004).