Mr. and Mrs. Lee operate a family business. Mrs. Lee works full-time in the business, receiving a salary of $70,000. Mr. Lee, who is retired, only owns 5% of the shares and receives $10,000 in eligible dividends annually. He provides no services to the business. How will Mr. Lee's dividends be treated under TOSI?

Question: Mr. and Mrs. Lee operate a family business. Mrs. Lee works full-time in the business, receiving a salary of $70,000. Mr. Lee, who is retired, only owns 5% of the shares and receives $10,000 in eligible dividends annually. He provides no services to the business. How will Mr. Lee's dividends be treated under TOSI?

Answer options:

• All $10,000 of dividends will be subject to TOSI as he provides no services.
• The dividends will not be subject to TOSI because Mrs. Lee is actively engaged. ✅ The dividends will be subject to TOSI if Mr. Lee is a 'specified individual' and the 'excluded amount' conditions are not met.
• Only dividends exceeding a 'reasonable return on capital' will be subject to TOSI.

Correct answer: The dividends will be subject to TOSI if Mr. Lee is a 'specified individual' and the 'excluded amount' conditions are not met.

Explanation: Since Mr. Lee does not provide services to the business, and is a 'specified individual' in relation to a 'related business', his eligible dividends may be subject to TOSI unless an exclusion applies. One such exclusion is if he owned 10% or more of the shares and the company earns less than 90% of its income from providing services. Another is if his spouse (Mrs. Lee) was actively engaged for at least 20 hours per week in the business, and he was 65 or older at year-end. Given he owns only 5% and isn't actively engaged, TOSI would likely apply unless another specific exclusion is met. The most accurate answer is that it's subject if the 'excluded amount' conditions, which include contribution and age, are not met.