Can you pay dividends to your spouse or adult children to lower your family’s tax bill? Sometimes — but since 2018 the Tax on Split Income (TOSI) rules can tax those dividends at the top personal rate, wiping out the saving, unless the family member qualifies for an exclusion. TOSI doesn’t ban income splitting through your corporation; it fences it in. Here’s when TOSI applies, the main exceptions — excluded business, excluded shares, and a reasonable return — and how incorporated owners across the GTA actually plan around it.
Table of contents
- What is income splitting through a corporation?
- What is the Tax on Split Income (TOSI)?
- When does TOSI NOT apply? (the excluded-amount exceptions)
- Excluded business: is the family member actively engaged?
- Excluded shares: do they own ≥10% of votes and value — and are they 25+?
- Reasonable return: is the amount reasonable for their labour, capital, and risk?
- Are they 65 or older, or is it inherited property?
- Did they contribute arm’s-length capital?
- The related-business trap many owners miss
- How do owners actually plan around TOSI, step by step?
- TOSI examples: who’s usually safe, who gets caught?
- How does TOSI fit with salary vs dividends and the small business deduction?
- Do you need to worry about TOSI?
- Frequently asked questions
What is income splitting through a corporation?
Why do owners pay dividends to family shareholders?
Once a family member holds shares in your corporation, dividends can be declared to them and reported on a T5 slip, normally taxed under the gross-up rules for the taxable amount of eligible and other-than-eligible dividends — unless TOSI overrides the rate. If that family member is in a lower tax bracket than you, the household pays less combined tax than if you’d taken all the income yourself — the classic “income sprinkling” play.
What changed in 2018?
Before 2018, TOSI only really touched dividends paid to minor children. Ottawa expanded the rules to adult family members too, closing off most income sprinkling that isn’t backed by real involvement, ownership, or capital in the business.
What is the Tax on Split Income (TOSI)?
What income does TOSI catch?
TOSI can catch certain taxable dividends, some shareholder benefits, taxable capital gains, and partnership or trust income that flows from a related business — a business a relative owns or actively runs.
Who is a “specified individual,” and what’s a “related business”?
A specified individual is broadly you, your spouse, or an adult family member connected to a related business. A related business is one a relative of that person owns shares in, or is actively engaged in. TOSI only applies within that family circle. In practice this circle is wider than owners expect — it can include a business a sibling or parent runs, not just the one you personally control, so a family shareholding a few steps removed from your own corporation can still be caught.
How hard does TOSI hit?
Where TOSI applies, the split income is taxed at the top marginal rate — federally 33%, with Ontario’s combined top rate running to roughly 53.5% — regardless of the recipient’s own bracket, and it’s reported by the recipient as federal tax on split income (line 40424) of their T1. The split saves the family nothing.
A worked example: TOSI at the top rate vs. an excluded amount
Say a corporation declares a $40,000 dividend to a spouse who isn’t otherwise involved in the business. Taxed personally in the spouse’s own hands — say a 20% average rate — the family would owe roughly $8,000, keeping about $32,000. But if that spouse doesn’t clear a TOSI exclusion, the same $40,000 is taxed at the top marginal rate instead, roughly 53.5% combined in Ontario — about $21,400 in tax, leaving under $18,600. The saving the family expected disappears, and then some, once TOSI applies.
Now compare a spouse who works genuinely, roughly 25 hours a week, in the business. The same $40,000 dividend can qualify as an excluded-business amount, taxed in the spouse’s own bracket instead — back to roughly $8,000 in tax and $32,000 kept. Same dividend, same family, two very different outcomes — the difference is entirely the exclusion test, not the amount declared. Figures are illustrative; run your own numbers before declaring a dividend.
When does TOSI NOT apply? (the excluded-amount exceptions)
TOSI has a list of “excluded amount” exceptions, set out in CRA’s rules on income sprinkling and the TOSI exclusions. Clear one and the split income is taxed normally, in the recipient’s own bracket.
Excluded business: is the family member actively engaged?
If the family member is actively engaged in the business on a regular, continuous and substantial basis — CRA’s rule of thumb is roughly 20 hours a week, this year or in any five earlier years — their dividends can qualify as an excluded business amount. Keep a record of the hours and role; the full test looks at more than the hour count alone. In practice, we look well beyond a simple hour count — regular attendance, real decision-making, and a role that would exist and be paid for even if it weren’t a family member doing it, all build the record.
Excluded shares: do they own ≥10% of votes and value — and are they 25+?
Excluded shares generally require the family member to be 25 or older and to hold at least 10% of both the votes and the value of the corporation, in a business that isn’t a professional corporation and doesn’t earn most of its income from services or from a related business. A family member under 25 generally can’t rely on the excluded-shares test at all — it’s built around the 25-and-older, ≥10%-votes-and-value combination, so younger adult children usually have to look to the excluded-business or reasonable-return tests instead. And the “non-services” condition bites more often than owners expect: a corporation earning most of its income from services — accounting, consulting, and many professional practices among them — generally can’t use excluded shares at all, whatever the ownership percentage.
Reasonable return: is the amount reasonable for their labour, capital, and risk?
Even outside the two tests above, CRA weighs whether the amount is a reasonable return given the work the family member did, the capital they contributed, and the risk they carried — a catch-all, facts-and-circumstances test. CRA looks at what an arm’s-length person would have been paid or invested for the same contribution — a family member who put in real sweat equity or real dollars, and is paid roughly what a stranger doing the same thing would receive, generally clears this test even without hitting the 20-hour or 10%-ownership marks.
Are they 65 or older, or is it inherited property?
There’s a retirement-style safe harbour: amounts a business owner aged 65 or older could receive without TOSI applying can generally be split with a spouse, similar to pension splitting. Inherited property carries its own relief.
Did they contribute arm’s-length capital?
A reasonable return on capital the family member genuinely contributed at arm’s length — money that’s really theirs, not simply gifted to make a share purchase look real — can also fall outside TOSI.
The related-business trap many owners miss
A common surprise: TOSI can apply even when the family member holds shares in a *different* corporation than the one they’re connected to, if that corporation is a “related business” — one a relative owns or is actively engaged in. An adult child who owns shares in a numbered holding company that in turn owns the operating business can still be caught, because the test looks through to the underlying related business, not just the entity issuing the dividend. This is one of the more common reasons a share structure that looked fine on paper gets flagged.
How do owners actually plan around TOSI, step by step?
Step 1: List every shareholder and their real involvement
Write down each family shareholder’s actual hours, role, capital contributed, and age — the facts every exclusion test turns on. We start every income-splitting review with exactly this list — it usually takes one conversation to build, and it’s the foundation everything else in this article rests on.
Step 2: Test each family member against an exclusion before declaring a dividend
Run the list against excluded business, excluded shares, reasonable return, and the 65+ / inherited-property safe harbours before the dividend is declared, not after. Skipping this step is the single most common mistake we see: owners declare the dividend first and ask about TOSI at tax time, when the only options left are to accept the top-rate hit or unwind the dividend.
Step 3: Pay a reasonable salary for real work
TOSI targets split *income*, not reasonable employment income for genuine work. A fair salary for real hours is deductible to the corporation and taxed normally in the recipient’s hands. For family members without real hours logged, we usually recommend starting here rather than a dividend — it’s a cleaner, lower-risk way to get money to a spouse or adult child for genuine work.
Step 4: Consider an estate freeze or family trust where it fits
An estate freeze or family trust and estate filing structure can bring family members in as shareholders correctly, with the right share class and documentation — worth a dedicated conversation rather than a DIY share transfer. These structures take real setup time, so start the conversation well before the year you actually want family members holding shares.
Step 5: Document the story
Hours logs, role descriptions, capital records, directors’ resolutions, and T5s should all tell the same consistent story if CRA ever asks — the same story that supports the calculation on Form T1206, Tax on Split Income. Corporations we work with that keep this file up to date rarely have a difficult TOSI conversation with CRA — the ones that don’t are the ones that do.
TOSI examples: who’s usually safe, who gets caught?
The table below is illustrative — every real family’s facts differ.
| Family shareholder profile | Likely TOSI verdict | Why |
|---|---|---|
| Spouse not active in the business, no real role | Likely caught | No excluded business, shares, or reasonable-return basis |
| Adult child in university, passive shareholder | Likely caught | Not actively engaged; usually under the ownership/age tests |
| Spouse working ~25 hours a week in the business | Likely excluded | Meets the actively-engaged / excluded-business test |
| Owner and spouse both age 65+ | Likely excluded | Falls under the retirement-style safe harbour |
| Passive family investor, no work, no real capital at risk | Likely caught | No excluded-business, excluded-shares, or reasonable-return basis |
“TOSI taxes ‘sprinkled’ family dividends at the top marginal rate, so the split saves nothing unless an exclusion applies.”
If your family’s shareholding looks like the “likely caught” rows above, book a free 30-minute call before the next dividend is declared — testing the exclusions is quick when it’s done ahead of time.
How does TOSI fit with salary vs dividends and the small business deduction?
A reasonable salary vs a TOSI-caught dividend
When a family member’s involvement doesn’t clear an exclusion, a reasonable salary for real work is usually the better route — it’s deductible to the corporation and taxed at the recipient’s own rate, where a TOSI-caught dividend would be taxed at the top rate regardless. We see this trade-off most often with a spouse who answers phones, manages billing, or handles marketing for an incorporated professional or trades business across the GTA — genuine part-time work that’s easy to document and pay properly, rather than force through a dividend that TOSI would tax away.
Splitting income doesn’t dodge the $50k passive-income rule
Even income that’s properly split still has to go somewhere. If the family keeps and invests it inside the corporation, the passive investment income it earns is measured against a separate $50,000 threshold that grinds down the small business deduction — a distinct, retained-earnings problem from TOSI’s distribution problem.
Do you need to worry about TOSI?
Family member is active 20+ hours a week, owns excluded shares, is 65+, or the amount is a reasonable return?
→ An exclusion likely applies. Document it and the dividend should hold up.
Passive family shareholder, adult child in school, or a services/professional corporation?
→ Assume TOSI applies — model it with a CPA first. Book a free 30-minute call before you declare.
Frequently asked questions
A rule, in force since 2018, that taxes certain dividends, capital gains, and trust or partnership income “sprinkled” to family members at the top personal rate — unless an exclusion applies — removing the tax saving from income splitting.
Only if your spouse clears a TOSI exclusion — for example, being actively engaged in the business, owning excluded shares, being 65 or older, or receiving a reasonable return. Otherwise the dividend is taxed at the top rate. Get advice before declaring it.
Usually caught by TOSI. An adult child who isn’t actively engaged (roughly 20 hours a week), doesn’t own excluded shares, and isn’t 25 or older with qualifying shares generally has the dividend taxed at the top rate.
The main “excluded amount” exceptions: excluded business (actively engaged), excluded shares (at least 10% of votes and value, owner 25+, non-services), a reasonable return, arm’s-length capital, and the 65+ / inherited-property safe harbours.
If your spouse is actively engaged on a regular, continuous and substantial basis — CRA’s rule of thumb is roughly 20 hours a week — their dividends can qualify as an excluded business amount and fall outside TOSI. Keep records of the hours and role.
TOSI targets split income, not reasonable employment income. A reasonable salary for genuine work is deductible to the corporation and taxed normally — but it must reflect real work at a fair rate, or CRA can challenge it.
Yes — there’s a retirement-style safe harbour: amounts a business owner aged 65 or older could have received without TOSI can generally be split with a spouse, mirroring pension splitting. Inherited property has its own relief. Confirm your facts with a CPA.
Get your income-splitting plan right, the first time
None of this is a reason to abandon income splitting — it’s a reason to test each family shareholder against the exclusions before a dividend is ever declared, which is exactly what we do with incorporated owners across Toronto, Markham, and Richmond Hill every year. If you’re setting up family shareholders for the first time, our incorporation and share-structure guidance is the right starting point; if you already have an existing corporation and are deciding this year’s dividend, our corporate tax filing services cover the T2 and T5 side, and split income lands on the recipient’s own personal tax filing. Ready to model your family’s actual facts? Book a free 30-minute call and we’ll walk through it with you.
Disclaimer: This article is general information, not personal tax advice. TOSI turns on each family member’s own facts — their involvement, ownership, age, and capital — so model your specific situation with a CPA before declaring dividends to family shareholders.