Tax on Split Income (TOSI)

Definition

Tax on Split Income (TOSI) under ITA s.120.4 imposes tax at the top federal personal rate (33%, plus the provincial equivalent) on "split income" received by a "specified individual" from a related business, unless a specific exclusion applies. TOSI was first introduced in 1999 targeting minors (the "kiddie tax") and was substantially expanded effective 2018 to cover adult family members. The expanded rules apply to 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 instead tested under s.67 reasonableness.

Key rules

• Specified individual: a Canadian-resident individual who receives split income. For adults, the rules test their relationship to a "source individual" who is involved with the related business.
• Split income: generally includes taxable dividends from private corporations (other than excluded shares), shareholder benefits under s.15, interest from related debt, and income from a partnership or trust to the extent it derives from a related business.
• Excluded amounts (the main escape hatches):
  • Income from an excluded business: the specified individual is actively engaged on a regular, continuous, and substantial basis (generally 20+ hours per week) in the business in the current year or in any five prior years (not necessarily consecutive).
  • Excluded shares: shareholder aged 25+, owns at least 10% of votes and value, the corporation is not a professional corporation, less than 90% of its business income is from services, and less than 10% of its income comes from another related business.
  • Reasonable return: an amount that is reasonable having regard to the individual's contributions of labour, assets, risk, and prior compensation. For individuals aged 18 to 24 this is limited to a return on contributed capital.
  • Age 65+ exception: if the source individual is aged 65 or older, amounts paid to the source individual's spouse are not split income (spousal pension-splitting analog).
• TOSI overrides the dividend tax credit, so the recipient effectively pays at the top federal personal rate. Foreign tax credits and the dividend gross-up still apply mechanically.
• TOSI does not apply to salary. The comparable test for salary is s.67 reasonableness.

Example

Facts: A 2026 BC CCPC operates a retail store. The shareholder's spouse owns 40% of voting and participating shares but does no work in the business. The corporation pays a $40,000 non-eligible dividend to the spouse.

Step 1: Is the spouse a specified individual?          Yes (adult resident)
Step 2: Is the corporation a related business?         Yes (shareholder owns 60%)
Step 3: Excluded business test?                        Fails (no active work)
Step 4: Excluded shares test?
        - 10%+ votes and value                          Yes (40%)
        - Not a professional corp                       Yes
        - <90% services income                          Yes (retail store)
        - Aged 25+                                      Yes
        Excluded shares exemption available             Pass

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

If instead the corporation earned 95% of its income from services (for example, a consulting firm), the excluded shares test would fail and the $40,000 dividend would be taxed at TOSI rates unless the spouse could establish a reasonable return based on genuine contributions.

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.

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.