TOSI (Tax on Split Income)

Tax on Split Income (TOSI) is a set of rules introduced in 2018 that eliminated most income-splitting strategies between business owners and adult family members. Before 2018, it was common for business owners to pay dividends or other income to family members (spouses, adult children) who had little or no involvement in the business, taxing that income at the family member's lower marginal rate. TOSI effectively removed this advantage for most passive recipients by taxing split income at the highest marginal rate regardless of the recipient's own income level.

Under the TOSI rules, income received by an adult family member from a related private business — including dividends, interest, and certain capital gains — is subject to tax at the top marginal rate unless the recipient qualifies for an exclusion. The main exclusions are: the recipient is actively engaged in the business on a regular, continuous, and substantial basis (generally 20 or more hours per week during the year or the preceding years); the recipient is 25 or older and holds shares that represent a significant interest in a corporation that is not a professional corporation; or the income is derived from a Qualified Small Business Corporation share sale where the capital gain is otherwise eligible for the LCGE.

The LCGE exclusion from TOSI is significant for business owners who have structured share ownership through a family trust: capital gains allocated to adult beneficiaries on the sale of QSBC shares remain eligible for each beneficiary's LCGE, and that gain is not subject to TOSI. Advance planning to ensure beneficiaries and trust structures meet the applicable exclusions is essential and typically requires advice from a tax professional.

See also: Attribution Rules, Family Trust, LCGE, QSBC, CCPC.