Splitting Income: Small Businesses and Family Members

Canada’s tax on split income (TOSI) rules apply to certain types of income received by adult family members from private corporations (and some related structures), including dividends, interest, and certain capital gains, unless an exclusion applies. The rules are intended to limit the benefit of splitting income with lower-taxed family members where the family member does not materially contribute to the business.

Important: These rules are law (not draft proposals). Details are complex and depend on your corporate structure, ownership, and each family member’s role. Always confirm current legislation and CRA guidance with your advisor.

Common exclusions (high level)

• Excluded business: Income from a related business may be excluded if the person was actively engaged in the business in the year, or in any five prior years, generally meaning at least an average of 20 hours per week during the part of the year the business operates (tests apply).
• Excluded shares: Adults 25+ may qualify if they hold shares meeting specific ownership and business-type tests (e.g. voting and value thresholds; service-business limits apply). Shares must meet defined terms in the Income Tax Act—get professional advice before relying on this exclusion.
• Other exclusions (e.g. certain capital gains, retirement amounts, reasonable returns) may apply in specific circumstances.

What you should do

• Review dividend and income-splitting strategies with your CPA before year-end.
• Do not rely on informal “salary vs dividend” planning without checking TOSI and related corporate attribution rules.

For authoritative detail, refer to the Department of Finance and CRA materials on tax on split income, and Canada.ca publications for the current year.

This post has been prepared for general information purposes. It is not advice. The information presented may not fit your unique situation. Please consult one of our trusted business advisors at RHN CPA for further clarification and interpretation of your circumstances.