What Is Tax on Split Income? TOSI Rules, Exceptions, and Rates

The tax on split income, known as TOSI, is a federal rule that taxes certain income shifted from a private corporation to a family member at the highest marginal rate. Combined federal and provincial tax on that income can reach roughly 55%, which wipes out the benefit of moving dividends, shareholder benefits, or certain capital gains to a spouse, child, or other relative in a lower bracket. The rule has applied to minors since 2000 and was expanded in 2018 to catch adults as well.

The good news for family businesses: several exclusions protect income going to relatives who genuinely work in the business, own a meaningful stake in it, or contributed real capital. Whether TOSI applies comes down to the recipient’s age, their role, and what kind of company is paying them.

Who the Rule Applies To

TOSI applies to a “specified individual” — a Canadian resident at year-end (or immediately before death) who is not a trust. For children under 17 at the start of the year, at least one parent must also be a Canadian resident at some point in the year.¹

Age is the biggest sorting factor because the available exclusions differ by bracket:

Minors (under 18 at year-end) face the strictest treatment. Virtually any passive income from a private corporation connected to a family member is taxed at the top rate, with almost no way to claim an exclusion.
Young adults (18 to 24) get a narrow escape through the safe harbour capital return and arm’s length capital rules.
Adults 25 and older have the widest set of exclusions: excluded business, excluded shares, and reasonable return.²

What Counts as Split Income

Split income generally includes dividends, shareholder benefits, and interest on debt paid by a private corporation, as long as the business is “related” to the recipient.² Capital gains from selling shares of a related business can also be caught. Income flowing through a partnership or trust triggers the same rules if the underlying profit traces back to a related business.

Salary and wages are not split income.³ A family member who receives a reasonable salary for work actually performed reports that salary as ordinary employment income and pays tax at their own marginal rate. Paying a family member fair wages for real work remains an effective way to distribute income from a private corporation without triggering TOSI.

When a Business Is “Related” to You

A business is related to a specified individual when a “source individual” — typically a parent, spouse, or close family member — is connected to it. The rule captures businesses carried on directly by the source individual, and situations where the source individual is actively engaged in a partnership, corporation, or trust that earns business income.¹

A corporation’s business is also related if a source individual owns shares (or property whose value derives from shares) representing at least 10% of the corporation’s total fair market value. That is a broad net. Even a passive equity stake held by a parent or spouse can make the corporation’s business “related” to a child receiving dividends.

The Excluded Business Exception

The most common route out of TOSI is qualifying the income as coming from an “excluded business.” The recipient must be actively involved in the business on a regular, continuous, and substantial basis during the year.¹

The statute provides a bright-line safe harbour. Working an average of at least 20 hours per week during the portion of the year the business operates automatically satisfies the test.³ Falling short of 20 hours does not automatically disqualify a person; it just turns the question into a factual inquiry about whether their involvement was genuinely regular, continuous, and substantial.

A look-back rule sweetens the deal. If the individual met the active involvement standard in any five prior taxation years, the business qualifies as excluded for the current year as well. Those five years do not need to be consecutive.¹ Once someone accumulates five qualifying years, the exclusion effectively becomes permanent for that business, which rewards family members who put in serious hands-on years before stepping back.

The Excluded Shares Exception

Adults 25 and older have a second route: excluded shares. The individual must directly own shares representing at least 10% of both the voting power and the fair market value of all outstanding shares.¹ Ownership must be direct. Shares held through a trust, holding company, or other intermediary do not count.

The corporation itself must also meet two conditions. It cannot be a professional corporation (the kind used by dentists, lawyers, doctors, and other licensed professionals), and less than 90% of its business income for the most recent taxation year must come from providing services.¹ The Act does not define “provision of services,” which creates real uncertainty for companies that blend product sales with service delivery. A business earning most of its revenue from selling goods will usually pass. A consulting firm or IT services company likely will not.

The exception is designed for capital-intensive businesses with real assets and product revenue. Service-based companies and professional corporations are excluded because the government views their income as more likely to reflect one family member’s personal efforts dressed up as passive investment returns.

Reasonable Return and Safe Harbour for Young Adults

Adults 25 and older who miss the 20-hour threshold and the excluded shares criteria can still carve out an “excluded amount” under the reasonableness test. The CRA looks at whether the income received is a reasonable return given the person’s labour contributions, capital invested, and financial risks assumed, such as personal guarantees on business loans.² This is qualitative, and the CRA weighs the totality of circumstances rather than applying a fixed formula.

Young adults 18 to 24 face a tighter version. Their excluded amount is limited to either a “safe harbour capital return” (a formulaic return on property they contributed) or a reasonable return that considers only the arm’s length capital they personally invested.¹ Arm’s length capital specifically excludes property received from a related person (other than an inheritance), borrowed money, and income that itself came from a related business. A 22-year-old who received shares as a gift from a parent and invested no money of their own will have a very hard time claiming any excluded amount. The system is built so that only income tied to capital the young adult earned or acquired independently escapes TOSI.

How Much Tax You Pay if Caught

When income is classified as split income and no exclusion applies, it is taxed at the highest federal marginal rate. The statute uses the phrase “highest individual percentage,” which for 2026 remains 33%.¹ This rate applies regardless of how much other income the individual earns. Someone with no other income at all still pays the top federal rate on every dollar of split income.

Provincial and territorial tax stacks on top. Each province applies its own top marginal rate, pushing the combined tax on split income to roughly 44.5% in Nunavut and close to 55% in Newfoundland and Labrador, with most provinces landing between 48% and 54%. Income caught by TOSI is taxed more heavily than if the high-earning family member had simply reported it themselves.

Most personal credits cannot offset TOSI. Section 120.4(3) sets a floor on tax payable, and only the disability tax credit and dividend or foreign tax credits directly attributable to the split income can reduce that floor.¹ Standard credits like the basic personal amount, age amount, or tuition credits cannot bring TOSI below the floor.

Death-Related Carve-Outs

TOSI does not treat every private-corporation payment to a surviving spouse as split income. A taxable capital gain that arises because of the individual’s death is not split income. If a surviving spouse or common-law partner receives income that would have been excluded had the deceased earned it, the exclusion carries over. The same treatment applies once the individual’s spouse has reached age 64.³

Reporting TOSI on Your Return

If you are a specified individual with split income that is not an excluded amount, you complete Form T1206, Tax on Split Income, and file it with your annual return.⁴ The calculated tax flows to line 40424 of the T1.⁵ Penalties for underreporting income subject to TOSI match those for any other tax deficiency, and the CRA actively scrutinizes private corporation distributions to family members.

1
Justice Laws Website. Income Tax Act – Section 120.4
2
Canada.ca. Guidance on the Application of the Split Income Rules for Adults
3
Canada Revenue Agency. Frequently Asked Questions – Income Sprinkling
4
Government of Canada. T1206 Tax on Split Income
5
Canada Revenue Agency. Line 40424 – Federal Tax on Split Income