Summary of 2025-1053231E5 – Power of Attorney and the “Excluded Shares” Exception to TOSI

Overview

CRA Technical Interpretation 2025-1053231E5 addresses whether granting a power of attorney (POA) over shares affects the “ownership” requirement for the “excluded shares” exception under the Tax on Split Income (TOSI) rules in section 120.4 of the Income Tax Act (ITA). The request arises from a scenario involving a family trust, a Canadian-controlled private corporation (CCPC), and the transfer of shares to an adult child who then grants a POA to his father.

Background: TOSI and Excluded Shares

TOSI is an anti-income splitting regime that applies to certain types of income received by specified individuals (generally, family members of a principal of a private corporation). The “excluded shares” exception, found in subsection 120.4(1), is a key carve-out from TOSI. It is intended to exempt from TOSI income derived from shares that represent a meaningful economic and voting interest in a private corporation, provided certain conditions are met.

For shares to be “excluded shares” of a specified individual at a particular time, the following must be satisfied:

  • The corporation is not a professional corporation and earns less than 90% of its business income from services.

  • The specified individual owns shares representing at least 10% of the votes and value of the corporation.

  • The corporation’s income is not derived from a related business in respect of the specified individual.

The focus of the interpretation is on the “ownership” requirement in paragraph 120.4(1)(b).

Scenario Presented

  • A family trust (FT) holds all 100 common shares of a CCPC (“Aco”).

  • The FT’s trustees are the parents of the “Adult Child,” who is over 24 years old and a beneficiary of the FT.

  • In 2025, the FT distributes 10 common shares of Aco to the Adult Child, making him the legal owner of 10% of Aco’s shares.

  • The Adult Child grants his father a POA over the 10 shares, authorizing the father to exercise all rights attached to the shares.

  • The question is whether the Adult Child continues to “own” the shares for the purposes of the “excluded shares” exception, or whether the POA arrangement undermines this status.

CRA’s Analysis

  1. Agency vs. Ownership

The CRA distinguishes between the legal concept of ownership and the authority to act as an agent. A POA is a legal instrument that authorizes one person (the attorney) to act on behalf of another (the grantor) in respect of certain property or rights. However, granting a POA does not transfer legal or beneficial ownership of the property to the attorney. The attorney acts as an agent, exercising rights on behalf of the owner, but does not become the owner or acquire a beneficial interest in the property.

  1. Application to the Scenario

In the scenario, the Adult Child, after receiving the 10 shares from the FT, is the legal owner of those shares. By granting a POA to his father, the Adult Child authorizes the father to exercise the rights attached to the shares (e.g., voting, receiving dividends, etc.), but does not transfer ownership or beneficial interest in the shares to the father.

  1. Legal Ownership for TOSI Purposes

For the purposes of paragraph 120.4(1)(b) of the “excluded shares” definition, the relevant test is whether the specified individual “owns” the shares. Since the Adult Child remains the legal and beneficial owner of the shares, the fact that the father can exercise the rights attached to the shares under a POA does not alter the ownership status. The Adult Child continues to “own” the shares for the purposes of the “excluded shares” exception.

  1. Scope of the Interpretation

The CRA’s comments are limited to the question of ownership of the shares for the purposes of the “excluded shares” exception. The CRA does not opine on the application of other provisions of the ITA that may affect the TOSI rules or any tax benefits associated with the transactions described.

Legal Principles and Precedents

  • Agency Law: The distinction between agency and ownership is fundamental in Canadian law. An agent (including an attorney under a POA) acts on behalf of the principal but does not acquire ownership of the principal’s property. The principal retains both legal and beneficial ownership unless there is an express transfer.

  • Tax Law Application: For tax purposes, the determination of ownership is based on legal and beneficial ownership, not on who exercises rights as an agent. The “excluded shares” exception is intended to apply where the specified individual is the true owner of the shares, not merely a nominee or agent.

  • CRA’s Consistent Position: The CRA’s position in this interpretation is consistent with previous administrative guidance and case law, which hold that the exercise of rights by an agent does not divest the principal of ownership.

Practical Implications

  • TOSI Planning: The interpretation provides clarity for tax planning involving family trusts and the distribution of shares to adult children. Granting a POA to a parent or other individual to manage or vote shares does not, in itself, jeopardize the “excluded shares” exception, provided the specified individual remains the legal and beneficial owner.

  • Corporate Governance: In family-owned corporations, it is common for parents to retain some control or oversight over shares distributed to children. The use of a POA for administrative convenience or to ensure continuity in decision-making does not, according to the CRA, affect the ownership test for TOSI purposes.

  • Limitations: The CRA’s comments are limited to the specific question of ownership for the “excluded shares” exception. Other anti-avoidance rules or provisions of the ITA may still apply, depending on the facts and circumstances.

Conclusion

The 2025-1053231E5 technical interpretation provides important guidance on the interaction between agency law and the TOSI “excluded shares” exception. The key takeaway is that granting a POA over shares does not, in itself, affect the ownership of those shares for TOSI purposes. The specified individual remains the owner, and the shares can qualify as “excluded shares” if all other conditions are met. This interpretation supports practical family and business arrangements while maintaining the integrity of the TOSI regime.