Tax on Split Income (TOSI): Age Exemptions and Form T1206

The Tax on Split Income, known as TOSI, is a Canadian federal rule that taxes certain income a private corporation or partnership pays to a business owner’s family members at the highest federal personal rate. For 2026 that rate is 33 percent, applied as a flat charge regardless of the recipient’s own tax bracket.¹ The rule exists to shut down income sprinkling, the practice of routing dividends or other payments to a spouse, child, or relative in a lower bracket to cut the family’s overall tax bill. If TOSI applies, the intended savings disappear.

Who Gets Caught

TOSI applies to a “specified individual” under section 120.4 of the Income Tax Act. That means a person (other than a trust) who is resident in Canada at the end of the tax year, or immediately before death if they die during the year. For a minor who has not turned 17 before the start of the year, at least one parent must also have been resident in Canada at any time in the year.¹

Being a specified individual is not enough on its own. The income also has to come from a business in which a related person is involved or holds a significant stake. Section 251 defines related persons broadly: blood, marriage, common-law partnership, adoption, and corporations controlled by any of them.² The net is wide enough to catch most family arrangements where money might be redirected away from the person who actually generated it.

What Counts as Split Income

Split income includes dividends and shareholder benefits from a private corporation where a related person is active or holds meaningful equity. It also covers interest on loans made to a private corporation or partnership and capital gains from selling shares or property whose value traces back to a related business. Income from professional corporations and service businesses is captured too, especially when the amount paid to a family member is out of proportion to any real contribution they made.

Public company dividends are outside these rules. Shares of corporations listed on a recognized stock exchange do not produce split income, so an ordinary investment portfolio is unaffected.

How the Tax Is Calculated

Section 120.4(2) sets the tax at the “highest individual percentage for the year” multiplied by the individual’s split income. For 2026 that is 33 percent, applied flat.¹ The calculation goes on Form T1206, and the result is entered on line 40424 of the T1 return.³

The credit rules are what make TOSI bite. Most personal credits, including the basic personal amount, cannot be used against the TOSI portion of the tax. Only three are allowed: the dividend tax credit, the foreign tax credit where the split income has a foreign source, and the disability tax credit.³ Even a recipient whose only income for the year is $15,000 of split dividends owes 33 percent on the full amount, with no basic personal amount to shelter any of it.

To stop the same dollars from being taxed twice, you claim an offsetting deduction on line 23200. You report the income on its normal line (dividends on the dividend line, for example), then deduct the same amount so it does not also run through the regular progressive brackets. The practical effect: split income is carved out of normal taxable income and taxed only at the flat 33 percent on Form T1206.³ Because line 23200 reduces net income at line 23600, split income should not inflate the adjusted family net income used to calculate benefits like the Canada Child Benefit.

Exemptions by Age

Whether income actually gets taxed under TOSI depends heavily on the recipient’s age at year end and their real connection to the business. The rules step up in flexibility at 18, 25, and 65.

Under 18

TOSI applies to almost all split income. The narrow escapes are income from property inherited on the death of a parent and income from a business inherited from a deceased parent. Minors have essentially no path to tax-advantaged income from a family business.

Ages 18 to 24

Two exemptions open up. The first is the excluded business test: if the young adult is actively engaged in the business on a regular, continuous, and substantial basis, the income is not split income. Working an average of at least 20 hours per week during the part of the year the business operates is a bright-line safe harbour. Being actively engaged in any five prior tax years, not necessarily consecutive, also qualifies.⁴

The second is the “reasonable return” and “safe harbour capital return” allowance, tied to arm’s length capital the individual contributed. Arm’s length capital means money the young person earned or received independently of the family business, such as employment income from an unrelated employer, an inheritance, or a gift.⁵ Money that started in the family business and was recycled through the young person does not count.

Ages 25 and Over

The excluded business and reasonable return tests still apply, and the “excluded shares” exemption is added. Shares qualify as excluded shares if the individual owns shares carrying at least 10 percent of the votes at an annual meeting and at least 10 percent of the fair market value of all issued shares.¹ There is a catch: less than 90 percent of the corporation’s gross business income must come from providing services, measured on the prior tax year’s gross revenue before expenses. If the corporation carries on more than one business, all gross business income is added together.⁶ Professional corporations for doctors, lawyers, and accountants routinely fail this test because their revenue is almost entirely service income.

Ages 65 and Over

A spousal rule applies. If the recipient is 65 or older and the spouse or common-law partner turned 64 before the start of the year, split income can qualify as an excluded amount so long as the income would have been excluded from TOSI if the spouse had received it directly. The same relief applies if the spouse has died, measured against the spouse’s tax treatment in their final year.⁷

Filing Form T1206

Form T1206 is where the calculation happens. You report total split income, identify any exemptions, and the form multiplies the taxable portion by 33 percent. The result flows to line 40424 of the T1 and is added to total tax payable.³ Paper filers attach the completed T1206; e-filers submit it as part of the electronic package.

Documents to gather before filing:

T5 slips for dividends received from a private corporation
T5013 slips for partnership income⁸
Records identifying the related business and the family member’s involvement
Evidence supporting any exemption you claim: time logs for the 20-hour test, records of arm’s length capital contributed, share registers showing ownership percentages

The burden of proving an exemption is on the taxpayer. Vague statements about “helping out” tend not to survive a CRA review. Keep contemporaneous records rather than reconstructing them at tax time.

If TOSI pushes net tax owing above $3,000 for 2026, and the same threshold was crossed in either 2025 or 2024, the CRA expects quarterly installments rather than a single payment at filing.⁹ Missing an installment date triggers interest.

Consequences of Getting It Wrong

Interest and penalties can add up quickly. The CRA charges compound daily interest at the prescribed rate on overdue balances; for the first quarter of 2026 that rate is 7 percent.¹⁰ Interest runs from the original due date, so a reassessment reaching back several years can generate a sizeable bill on its own.

Section 163(2) of the Income Tax Act adds a gross negligence penalty of 50 percent of the additional tax owing where a taxpayer knowingly makes a false statement or omission, or is so careless that the conduct amounts to indifference to the law.¹¹ The CRA must prove this on a balance of probabilities, and honest mistakes do not trigger it. Fabricating hours to claim the excluded business exemption, or deliberately ignoring the rules, can. Combined with back taxes and compound interest, the penalty can more than double the cost of the original non-compliance.

1
Justice Laws Website. Income Tax Act – 120.4
2
Justice Laws Website. Income Tax Act – 251
3
Canada Revenue Agency. Line 40424 – Federal Tax on Split Income
4
Tax Interpretations. 2020-0837631C6 – TOSI – Excluded Business
5
Canada Revenue Agency. T1206 Tax on Split Income
6
Canada Revenue Agency. Tax on Split Income – Excluded Shares
7
Canada Revenue Agency. Frequently Asked Questions – Income Sprinkling
8
Canada Revenue Agency. T5013 Statement of Partnership Income
9
Canada.ca. Required Tax Instalments for Individuals
10
Government of Canada. Interest Rates for the First Calendar Quarter
11
Justice Laws Website. Income Tax Act – 163