Tax and accounting terms
TOSI Explained: How the Tax on Split Income Works in Canada
33%the highest federal rate, applied to every dollar of split income however little else the person earns, with provincial tax added at its highest rate too.
Sources checked October 20263 min read
What TOSI is
Tax on split income stops a business owner from lowering the family's tax bill by routing business income to relatives in lower brackets. Where it applies, the income is taxed at the highest marginal rate, and only the dividend tax credit, the disability tax credit and the foreign tax credit can reduce it. The rules were extended to adults starting with the 2018 tax year.
Split income includes private company dividends and shareholder benefits, income from a partnership or trust that comes from a related business, interest on certain loans to a private corporation, partnership or trust, and in some cases gains on selling those shares or interests. A business is related when a relative resident in Canada, called a source individual, is actively engaged in it, or owns at least 10% of the value of the corporation that carries it on.
Key points
- Applies to dividends and certain other income family members receive from a business a relative is involved in
- Taxed at the highest marginal rate, with only a few credits allowed against it
- Exclusions depend on age, and widen at 18 and again at 25
- Calculated on Form T1206 and reported at line 40424 of the return
Exclusions by age
Under 18, almost nothing escapes TOSI, and a gain on selling private company shares to a relative is taxed as a dividend instead. The exclusions open up with age:
| Age at year end | Excluded amounts include |
|---|---|
| Any age | Gains on qualified small business corporation shares or qualified farm or fishing property, gains deemed on a death, and property received on the breakdown of a marriage or common law partnership |
| Under 25 | Income from property inherited from a parent, or from anyone if the person is a full time post secondary student or eligible for the disability tax credit |
| 18 or older | Income from an excluded business, or income not derived from a related business |
| 18 to 24 | A safe harbour return at the prescribed rate, or a reasonable return, on capital the person contributed from their own resources rather than borrowed or received from a relative |
| 25 or older | Income from excluded shares, a reasonable return from a related business, and amounts that would be excluded in the hands of a spouse aged 65 or older |
Excluded business and excluded shares
An excluded business is one the person is actively engaged in on a regular, continuous and substantial basis in the year or in any five earlier years. Working an average of at least 20 hours a week during the part of the year the business operates meets the test. A daughter who worked in the family company for five years can therefore keep receiving dividends from that business free of TOSI in later years, even after she stops working there.
Excluded shares are shares an adult aged 25 or older owns directly, carrying at least 10% of both the votes and the value of the corporation, where the corporation is not a professional corporation, earns less than 90% of its business income from services, and does not draw its income from another related business. The services test rules out most consulting corporations, which is why the reasonable return test matters more for them.
Spouses, reasonable returns and filing
When the business owner is 65 or older, amounts received by their spouse or common law partner are excluded if they would have been excluded in the owner's hands. For adults 25 and older, a reasonable return is also excluded, judged against the work each person did, the property they contributed, the risks they took and what they have already been paid.
TOSI is calculated on Form T1206 and reported at line 40424 of the federal return and line 61510 of the provincial or territorial form. A family that pays dividends to adult children or a spouse should record which exclusion applies each year, because each one is tested on the facts of the year the income is received.
Quick answers
Does TOSI apply to a salary paid to a family member?
No. Split income covers dividends, shareholder benefits and certain partnership, trust and interest income, not employment income. A salary still has to be reasonable for the work done to be deductible to the corporation.
At what age does TOSI stop applying?
It never stops on age alone. Turning 18 opens the excluded business exclusion, turning 25 adds excluded shares and the reasonable return test, and a business owner turning 65 lets amounts paid to their spouse qualify where they would for the owner.
Which form calculates TOSI?
Form T1206, Tax on Split Income. The federal amount goes on line 40424 of the return.
Related pages
Official sources
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Important. This article provides general educational information, not legal or tax advice for a specific business. Rules, administrative policies, rates and deadlines can change. Confirm your facts and current obligations with the responsible government agency and a qualified adviser.