Tax on Split Income (TOSI)

What TOSI is

Tax on Split Income (TOSI) under ITA s.120.4 taxes "split income" received by a "specified individual" at the top personal rate, 33% federally plus the top provincial rate, unless an exclusion applies. It began as a rule for minors (the "kiddie tax") and was extended to adult family members for 2018 and later years. It reaches dividends from private corporations, shareholder benefits, income from certain partnerships and trusts, and some debt-related income. Salary paid to a family member is not split income; it is tested instead under the s.67 reasonableness rule.

For an owner-manager the practical question is which money paid to a spouse, child or parent is caught, and which ways of splitting income inside a family still work. This entry answers both.

Who and what it catches

• Specified individual: an individual resident in Canada at the end of the year. A minor also needs a parent resident in Canada at some time in the year.
• Source individual: a Canadian-resident individual related to the specified individual, typically the owner.
• Related business: a business the source individual carries on, is actively engaged in on a regular basis, or owns at least 10% of by fair market value of the shares.
• Split income: generally taxable dividends on private-corporation shares, shareholder benefits under s.15, interest on debt of a related business, and income from a partnership or trust to the extent it comes from a related business.
• Not split income: salary. The CRA says plainly that the TOSI rules do not apply to salary. Salary to a family member is tested under s.67 reasonableness instead.

The exclusions, by age

An amount that fits an exclusion is taxed normally. Which exclusions are available depends on the recipient's age in the year.

• Excluded business (18 and older): the individual is actively engaged on a regular, continuous and substantial basis in the business in the current year or in any five prior years, which need not be consecutive. Working an average of at least 20 hours a week during the part of the year the business operates counts automatically. Below 20 hours it is a question of fact.
• Excluded shares (25 and older): shares the individual owns directly, where
  • the shares carry 10% or more of the votes and 10% or more of the value of the corporation,
  • less than 90% of the corporation's business income for its last year came from providing services,
  • the corporation is not a professional corporation, and
  • all or substantially all of its income does not come from another related business in respect of the individual, other than the corporation's own business.
• Reasonable return (25 and older): an amount that is reasonable given the work the individual performed, the property they contributed, the risks they assumed, what they have already been paid, and other relevant factors. The CRA has said it will not generally substitute its own judgement where the family made a good-faith attempt to set a reasonable amount.
• 18 to 24: the reasonable return test looks only at arm's length capital, property the individual contributed that was not borrowed from anyone, transferred from a related person (other than inherited property), or derived from income or gains from a related business. A safe harbour capital return, a time-weighted statutory return using the highest prescribed interest rate for the year and the qualifying capital contributed, is also excluded.

How the tax is calculated

The split income is taxed at 33% federally and at the province's top rate, 20.5% in BC. The dividend tax credit, the foreign tax credit and the disability tax credit still reduce that tax. The basic personal amount and other credits do not. The calculation is done on Form T1206, with the federal result on line 40424 and the BC result on line 61510 of Form BC428.

For a non-eligible dividend in BC that works out to 48.89% of the cash dividend:

Federal: (33% - 9.0301%) x 1.15            27.57%
BC: (20.5% - 1.96%) x 1.15                 21.32%
Tax per dollar of cash dividend            48.89%

Example: a dividend to a spouse who does not work in the business

Facts: A 2026 BC CCPC operates a retail store. The shareholder's spouse is at least 25, owns 40% of voting and participating shares acquired without attribution applying, and does no work in the business. The corporation pays a $40,000 non-eligible dividend to the spouse.

Step 1: Specified individual?                 Yes (adult resident)
Step 2: Related business?                     Yes (shareholder owns 60%)
Step 3: Excluded business?                    Fails (no active work)
Step 4: Excluded shares?
        - 10%+ votes and value                Yes (40%)
        - Not a professional corp             Yes
        - <90% services income                Yes (retail store)
        - <10% from another related business  Yes (retail only)
        - Aged 25+                            Yes
        Excluded shares test                  Pass

Result: TOSI does not apply because the excluded shares test is met.

With no other income, the spouse owes about $934 of BC tax on the $40,000 and no federal tax, because the basic personal amount and the dividend tax credit absorb it.

If instead the corporation earned 95% of its income from services (for example, a consulting firm), the excluded shares test would fail. Unless the spouse could establish a reasonable return based on genuine contributions, the dividend would be split income:

Grossed-up dividend ($40,000 x 1.15)       $46,000
Federal: 33% x $46,000                     $15,180
  less dividend tax credit (9.0301%)     ($4,153.846)
BC: 20.5% x $46,000                         $9,430
  less BC dividend tax credit (1.96%)       ($901.60)
Tax on split income                     $19,554.55

The same $40,000 costs about $19,555 in tax instead of about $934, under the stated facts.

What income splitting is still possible

Income splitting moves income from a higher-bracket family member to a lower-bracket one so the household pays less tax. Beyond TOSI, the attribution rules block the informal versions:

• Spouse: income from property you transfer or lend to your spouse is taxed as yours (s.74.1(1)), and so are capital gains on it (s.74.2). The exceptions are a sale at fair market value where you elect out of the spousal rollover, and a loan at the prescribed rate with the interest actually paid (s.74.5(1) and (2)).
• Minor children, nieces and nephews: income from property you transfer or lend to them is taxed as yours for every year that ends before they turn 18 (s.74.1(2)). Capital gains are not attributed.
• Through a corporation: if you transfer or lend property to a corporation and one of the main purposes is to reduce your income and benefit your spouse, or a relative, niece or nephew under 18, who is a specified shareholder of it (broadly, 10% or more of any class of its shares, counting shares held by related people), s.74.4 treats you as receiving interest at the prescribed rate on the property, less any interest and certain dividends you actually receive. It does not apply while the corporation is a small business corporation.

The statutory splits:

• Prescribed-rate loan (s.74.5(2)): lend to the lower-income spouse at no less than the prescribed rate in effect when the loan is made (3% for loans made from July to December 2026; the rate stays fixed for the life of the loan), and have the interest for each year paid no later than January 30 of the next year. Income the spouse earns above that interest is taxed in their hands.
• Spousal RRSP (s.146(5.1) and s.146(8.3)): the higher-income spouse contributes and deducts. Attribution can tax a withdrawal to the contributor up to the relevant contributions made in the withdrawal year or either of the two preceding years; exceptions and the amount attributed must be checked.
• Pension income splitting (s.60.03): up to 50% of eligible pension income can be moved onto a spouse's return by a joint election on Form T1032. Life annuity payments from a registered pension plan qualify at any age. RRIF and life income fund payments qualify from 65. CPP and OAS never qualify.
• CPP pension sharing: spouses living together can share the CPP retirement pension earned during the months they lived together. One of them must be receiving or have applied for the retirement pension. The two pensions together stay the same; the tax on them can go down.
• Gifts for a TFSA or FHSA: money you give your spouse to contribute to their own TFSA or FHSA is not attributed back while it stays in the plan (s.74.5(12)(c)).

Worked examples of splits that hold up

A simplified BC comparison for 2026: one spouse earns a $250,000 salary from the family CCPC and the other has no income. Both are under 65, CPP applies, and assume both employments are EI-excluded. The figures include basic personal amounts, the employment amount, base CPP credits, enhanced CPP deductions and BC tax reduction. They deliberately exclude spousal/dependant credits, the Canada workers benefit and other household benefits, so they are not a complete household tax forecast.

1. Salary for real work. The lower-income spouse does 15 hours a week of genuine bookkeeping and admin for 50 weeks at a market rate of $35 an hour: $26,250. The corporation pays it through payroll, issues a T4, and funds it by reducing the higher salary by the same amount plus the employer CPP on it.

Before: salaries $250,000 and $0
  Household income tax (federal + BC)          $81,224

After: salaries $222,396 and $26,250
  Higher-income spouse                         $68,500
  Lower-income spouse                             $972
  Household income tax                         $69,472

Income tax saved                               $11,752
New CPP on the $26,250 (each side)              $1,354
Extra household cash after all CPP              $9,045

The new CPP buys the lower-income spouse their own CPP pension.

2. Prescribed-rate loan. The higher-income spouse lends $200,000 at 3%. The lower-income spouse invests it and earns $10,000 of interest, pays $6,000 of interest back by January 30, and deducts it.

Lower-income spouse: $10,000 earned - $6,000 interest paid   = $4,000 taxable
Higher-income spouse: reports the $6,000 interest received
Income moved to the lower bracket                             $4,000
Tax reduction before other credit/benefit changes             ~$1,844 a year

The example's approximate 46.095% marginal rate includes 29% federal tax, 16.8% BC tax and the phase-out of the federal basic personal amount at that income. The estimate assumes the $4,000 is within the same bands and the lower-income spouse has enough unused basic credits; other family-credit and benefit changes are excluded. Only the return above the prescribed rate moves. Miss one January 30 interest payment and attribution applies for that year and every year after.

3. Pension income splitting in retirement. At 65 the higher-income spouse draws $60,000 from a RRIF. The couple elects on Form T1032 to report up to $30,000 of it on the other spouse's return.

A dividend to the non-working spouse from the CCPC, in contrast, is split income unless the excluded shares or reasonable return exclusion applies.

Common mistakes

• Paying dividends to adult family members without running through each excluded amount. The excluded shares test specifically excludes professional and services corporations from the easier safe harbour.
• Treating 20+ hours per week as "typical" rather than "regular, continuous, and substantial". The 20-hour rule is a safe harbour, not the only way to qualify.
• Relying on "reasonable return" without evidence of contributed labour, assets, or risk.
• Forgetting that TOSI applies to deemed dividends and shareholder benefits, not just ordinary dividends.
• Assuming salary paid to a family member is safe because TOSI does not apply. It is still subject to the s.67 test. A flat "salary" with no time records or job description is the usual casualty.
• Paying dividends to adult children through a family holding company without testing each exclusion.
• Gifting investment capital to a spouse outright and ignoring attribution.
• Running a prescribed-rate loan without paying the interest by January 30 each year.
• Contributing to a spousal RRSP and letting the spouse withdraw within the attribution window, which taxes the withdrawal back to the contributor.

Related concepts

TOSI is the single largest constraint on income splitting through private-corporation dividends and shapes every salary versus dividend decision where family members hold shares. It interacts directly with the eligible and non-eligible dividend mechanics because the top-rate charge sits on top of the gross-up. Salary and fees paid to family fall under reasonableness instead, and which shares a family member holds is set by the corporation's share classes. Retirement savings for a spouse are covered in RRSP, TFSA or corporate investing.