The tax on split income (TOSI) rules tax dividends paid to your spouse or kids from your private corporation at the top marginal rate, no matter how little other income they have. That’s the stick. Four exceptions still leave real room for family income splitting, and salary was never caught in the first place. Since 2018 the rules have applied to adult family members, so any dividend plan built before that year deserves a second look.
What the TOSI rules actually do
TOSI targets what the Income Tax Act calls split income: dividends from a private corporation, certain interest, and certain capital gains that flow to a family member of the person actually running the business. When the rules apply, the amount is taxed at the top marginal rate regardless of the recipient’s other income. Splitting a $60,000 dividend with a spouse who earns nothing saves nothing if TOSI catches it.
CRA doesn’t ask whether you meant to sprinkle income. The rules apply mechanically, and the exceptions are the only way out.
Salary is outside TOSI
The TOSI rules don’t apply to salary. If your spouse or adult child genuinely works in the business, you can pay them wages without TOSI ever entering the picture. The test that applies instead is reasonableness: the pay has to line up with what the work is worth. We cover the numbers in our guides on paying your spouse and paying your child.
That makes payroll the simplest family split there is.
The excluded business exception: the 20-hour rule
Dividends to a family member 18 or older escape TOSI when the business is an excluded business for them, meaning they’re actively engaged in it on a regular, continuous and substantial basis. CRA’s bright line: working an average of at least 20 hours a week during the part of the year the business operates.
Meeting that test in any five earlier years also works, and those years don’t have to be consecutive or fall after 2018. Once the five-year test is met, it’s met for good. A spouse who put in full weeks during the startup years and stepped back later can still receive dividends TOSI-free today. Keep the evidence, though: schedules, payroll records, anything that shows real hours. In a review, “she’s always helped out” won’t carry the day.
Excluded shares: the 10% votes-and-value route
Family members who are 25 or older can also step outside TOSI through excluded shares. The conditions are strict. They must directly own shares carrying at least 10% of both the votes and the value of the corporation, less than 90% of the corporation’s business income can come from services, the corporation can’t be a professional corporation, and its income generally can’t be derived from another related business.
Here’s the trap: directly means directly. Shares held through a family trust don’t qualify, which kills this exception in many otherwise careful structures. Consultants and agencies usually fail the services test before share ownership even comes up, and professional corporations are shut out of this route entirely. Moving 10% of a valuable company to a spouse also has tax consequences of its own, so plan this with advice.
Age 65 and the reasonable return fallback
Two more paths. First, CRA mirrors pension income splitting: dividends you pay your spouse are generally excluded once you, the spouse who built the business, reach the year you turn 65, provided the amount would have escaped TOSI had you received it yourself. In practice this opens up spousal splitting around retirement age.
Second, family members 25 and over can receive a reasonable return, judged on their work, capital contributed, risks taken and what they’ve already been paid. It’s the most subjective exception and the one most likely to be argued with CRA, so we treat it as a fallback rather than a plan. For 18-to-24-year-olds it’s narrower still, limited to a safe-harbour return on capital they contributed themselves, at arm’s length from the business.
Dividends to minor children remain caught in nearly every case, as they have been since 2000.
Frequently asked questions
What are the TOSI rules in Canada?
TOSI taxes dividends and certain other income paid from a private corporation to family members at the top marginal rate unless an exception applies. Minors were always caught; adults were added in 2018.
Does TOSI apply to salary?
No. Salary paid to a family member isn’t split income. The pay still has to be reasonable for the work performed, but that’s a different and more forgiving test than TOSI.
What are excluded shares under TOSI?
Shares a family member 25 or older owns directly that carry at least 10% of the corporation’s votes and value, where the corporation earns less than 90% of its business income from services and isn’t a professional corporation. Dividends on excluded shares are outside TOSI.
Can I still pay dividends to my spouse from my corporation?
Often, yes. The usual routes are the 20-hour test (now or in any five earlier years), excluded shares, or the age-65 rule once the spouse who runs the business reaches that stage. Confirm the exception before the dividend is paid; there’s no fixing it after.
Related guides
- Pay your spouse from your business in Canada: salary, dividends, and the attribution trap
- How much can you pay your child tax-free from your business
- Can you pay your kids from your business in Canada?
- Corporate tax services
Not sure where you stand?
TOSI turns on facts, from the hours a family member worked to what the corporation actually earns. We review family pay structures for owner-managed corporations and tell you which exceptions you can rely on before CRA asks. Get in touch and we’ll take a look.
Related guides
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