Tax on split income (TOSI)

What the tax is aimed at

TOSI applies when two things are true: you are a specified individual, and you have split income for the year that is not an excluded amount. Split income includes taxable dividends on shares of most private corporations, shareholder benefits tied to those shares, income passed through a partnership or trust from a related business, and some interest on debt owed by those entities.

It is not limited to children. The rules reach adults too, which surprises owners who assume that a spouse or adult child with shares can simply receive dividends. The tax is reported on Form T1206 and entered on line 40424 of the federal return, with the Ontario amount carried to Form ON428.

The main exclusions

The CRA lists several excluded amounts. Examples include income from property transferred after a marriage or common-law breakdown, certain gains on qualified farm or fishing property or qualified small business corporation shares, and income that is not derived from a related business, or that comes from an excluded business, for people 18 or older. Which exclusion is available often depends on age.

For someone 25 or older, income from excluded shares or an amount that is a reasonable return from a related business can be excluded. For ages 18 to 24, the tests are narrower and focus on returns from arm’s length capital. Amounts that would be excluded for a spouse who is 65 or older can also be excluded. The labour, capital and risk a person actually contributes matter, and share ownership alone does not settle the question.

A simple illustration

Suppose an Ontario corporation pays a $40,000 dividend to the owner’s spouse, who holds shares but has no role in the business and is under 65. Unless an exclusion fits, that dividend could be split income and taxed under TOSI instead of at the spouse’s normal rates, which can erase the benefit of paying it. If the spouse works regularly in the business, the answer may differ. This example is illustrative only and does not apply any rates.

What to discuss with your accountant

Before declaring a dividend to a family shareholder, ask whether an exclusion applies and what evidence supports it. Bring share records, a description of who does what in the business and when, any capital the person contributed and the amounts paid in prior years.

Compare dividends with other options, such as a reasonable salary for work actually performed, which is taxed under different rules. The link between TOSI and the rules on gifting or lending money to relatives is covered under attribution rules, and benefits paid through the company are covered under shareholder benefit.