If you run a family business in Canada, you've likely heard the term TOSI — or Tax on Split Income. Since sweeping changes came into effect in 2018, the rules around paying dividends to family members have become significantly more complex. Understanding TOSI is no longer optional for incorporated business owners; it's essential planning knowledge. This guide breaks down what TOSI is, who it affects, what income it catches, and — critically — how to qualify for an exclusion so your family members can still benefit from corporate dividends in a tax-effective way.
TOSI stands for Tax on Split Income. It is a set of rules under the Income Tax Act that taxes certain income received by family members of a business owner at the highest marginal federal and provincial tax rate — regardless of the recipient's actual income level. In Alberta, that top combined rate sits around 48% for 2025.
The intent behind TOSI is straightforward: prevent business owners from artificially reducing their family's overall tax burden by routing business income through low-income family members who then pay tax at a lower personal rate. Prior to 2018, this type of income splitting was a well-established (and entirely legal) tax planning strategy. TOSI changed that calculus significantly.
Before the 2018 reforms, a common tax planning strategy worked like this. A business owner incorporates, and adult family members — a spouse, adult children — are made shareholders. The corporation earns income, and the owner pays dividends to family members in lower tax brackets. A spouse earning $30,000 from other sources, for example, might receive $50,000 in dividends and pay substantially less tax than the business owner would on the same amount. The family unit saves thousands of dollars annually in income tax, entirely within the rules.
The federal government viewed this as an unintended benefit — particularly where family members contributed little or nothing to the business's success. The 2018 changes, introduced as part of the government's small business tax reform package, closed this planning avenue by applying the highest marginal rate to "split income" in the hands of the recipient unless a specific exclusion applies.
TOSI applies to adult family members (those 18 years of age and older as of the end of the calendar year) who receive certain types of income from a business where a related person — typically a parent or spouse — has an interest. The "related business" concept is broadly defined: it captures situations where the income source is connected to a person who is related to the recipient under tax law.
Minor children (under 18) are subject to a separate, older set of rules under TOSI, but the 2018 expansion specifically brought adult family members into scope. Practically speaking, this most commonly affects:
TOSI applies to what the Act defines as "split income." For adult family members of a private business owner, this primarily includes:
The breadth of these categories means that most income flows from a family-owned private corporation to an adult shareholder will be caught by TOSI unless a specific exclusion is satisfied.
This is where planning becomes critical. The Income Tax Act provides several exclusions that can remove income from TOSI's reach entirely. Meeting even one of these exclusions means the recipient is taxed at their actual marginal rate — not the top rate.
If the family member actively works in the business for 20 or more hours per week during the current taxation year, their income from that business is excluded from TOSI. Alternatively, if the recipient worked 20+ hours per week in the business in any five prior calendar years (not necessarily consecutive), they qualify for the excluded business exception going forward — even if they now work fewer hours.
This exclusion is particularly valuable for spouses or adult children who play a genuine operational role in the business. It rewards real participation and is the most commonly used path out of TOSI for family businesses.
A family member's income is also excluded from TOSI if their shares meet all of the following conditions:
This exclusion is designed to protect genuine ownership stakes in diversified operating businesses. A 28-year-old who holds shares in a family manufacturing or retail company — where the company sells products broadly, not primarily to other family companies — can typically rely on this exclusion, provided the other conditions are met.
For recipients who are 25 years of age or older, income is excluded from TOSI if it represents a reasonable return on their contributions to the business. CRA looks at the labour the family member contributed, the capital they invested, the risks they assumed, and any other relevant factors. The "reasonableness" standard is inherently subjective, and documentation of the family member's contributions is essential when relying on this exclusion.
This exclusion is useful where a family member has contributed meaningful capital or taken on personal guarantees for the business, even if their day-to-day working hours fall below the 20-hour threshold.
Where a shareholder has reached age 65, there are limited provisions that may reduce TOSI's application, particularly where income splitting would otherwise mirror spousal RRSP or pension income splitting rules available to other retirees. These provisions are narrower than the general exclusions above and require careful review.
Where a family member has inherited shares from a deceased spouse or common-law partner, those shares are generally excluded from TOSI. This prevents a surviving spouse from being penalised for continuing to hold an interest that was built jointly during the marriage.
TOSI has meaningfully changed how family businesses structure their dividend distributions. The broad strokes look like this in practice: adult family members who work meaningfully in the business — genuinely contributing 20 or more hours per week — can still receive dividends and pay tax at their own marginal rate. This remains a viable and legitimate tax planning tool for families where multiple members are genuinely involved in operations.
Family members with no real involvement in the business, however, can no longer receive dividends at low rates simply by virtue of holding shares. The income will be taxed at the top marginal rate, eliminating the tax advantage entirely.
For businesses that have historically used family trusts or multiple share classes (so-called "alphabet shares") to flow income to family members, a thorough review of the corporate structure is now essential. In many cases, restructuring, buybacks, or revised dividend policies are warranted.
At Swift Accounting Calgary, we work regularly with incorporated business owners to assess their current corporate structures against the TOSI rules, identify which family members qualify for exclusions, and document the evidence needed to support those positions if CRA reviews the return.
Even where a TOSI exclusion is clearly available, the failure to document it properly is a common and costly mistake. If CRA audits a corporation and challenges dividend allocations, the burden falls on the taxpayer to demonstrate that the exclusion applied. This means maintaining records of hours worked, employment agreements, capital contributions, risk assumed, and any other evidence relevant to the exclusion being claimed. Good recordkeeping isn't just good practice — under TOSI, it can mean the difference between a clean audit and a significant tax reassessment.
The team at Swift Accounting can help you build and maintain the documentation framework your corporate structure requires.
No. If your spouse works 20 or more hours per week in the business during the year, they qualify for the "excluded business" exception and their dividends are not subject to TOSI. They will be taxed at their own marginal rate, making income splitting through dividends a viable strategy. Documentation of those hours is important in case CRA asks.
It depends. If your child is 25 or older and the corporation meets the excluded shares criteria — not a professional corporation, not a service company primarily serving related persons — the dividends may still be excluded from TOSI. The reasonable return exclusion may also be available if your child contributed capital or assumed risk. If none of these exclusions apply, dividends will be taxed at the top marginal rate in their hands.
Yes, and the trust structure actually limits which exclusions are available. The "excluded shares" exception does not apply where shares are held through a trust. Family trust structures require close examination under the current rules, and in some cases restructuring the shareholdings may be worth considering. A CRA review of trust-based dividend flows is more likely where TOSI exclusions are claimed.
The core framework has remained largely consistent since the 2018 reforms. The rates, thresholds, and exclusion tests are the same in substance. However, CRA interpretive guidance and court decisions continue to clarify how specific exclusions apply in practice — particularly the reasonable return and excluded shares tests. It's worth reviewing your structure with an accountant annually, especially if your family members' roles or investment levels have changed. Contact us at Swift Accounting to book a review.
Ready to review your corporate structure for TOSI compliance? Contact Swift Accounting today to speak with a Calgary accountant who understands the rules and can help you structure your business distributions efficiently and defensibly.
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