TOSI rules for family businesses
Tax on Split Income (ITA s. 120.4), as expanded from 2018, taxes dividends and certain other amounts paid to family members at the top federal/provincial marginal rate unless one of five exclusions applies. Get it wrong and the family-share strategy that worked for decades produces 50%+ tax.
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Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact CRA. Read our editorial scope →
1. What TOSI applies to
Dividends and similar split income from a related private corporation, partnership income from a related business, and certain interest. Salary paid to a working family member is not TOSI — it is governed by the reasonableness test for deductibility (s. 67).
2. Family-member scope
TOSI applies to amounts received by a "specified individual" from a "related business." Specified individuals include the spouse and minor/adult children of the business owner; the related business test reaches uncles, aunts, in-laws, and broader family in many situations.
3. The five exclusion tests
a) Excluded business — 20+ hours/week
The recipient was actively engaged on a regular, continuous, substantial basis (≥20 hrs/week average) either in the current year or any five prior years. Contemporaneous timesheets, calendars, and email trails are the proof.
b) Excluded shares — adults 25+
Adult ≥25, owns ≥10% of votes and value, the corporation is not a professional corporation, earns<90% of income from services, and is not a related-business income source. This protects legitimate ownership by mature working adults.
c) Safe harbour capital return — adults 18–24
Adults aged 18–24 may receive a return equal to the prescribed rate × the FMV of capital they independently contributed and continuously held.
d) Reasonable return — adults 25+
Adults 25+ may receive a "reasonable" return considering work, property, risks assumed, and historical payments. This is the most fact-driven exclusion and the most likely to be challenged.
e) Arm's-length capital — adults 25+
Return on capital that came from a non-related-business source (independent savings, inheritance from a non-family-business source).
4. TOSI + LCGE interaction
Capital gains on QSBC shares triggering the LCGE are generally not subject to TOSI, even where dividends from the same shares would be. This preserves family LCGE multiplication on a true business sale.
5. Documentation
- Time logs showing hours worked (for 20-hour test)
- Capital contribution paper trail (source-of-funds documentation)
- Reasonable-return analysis: market comparators for the role / capital
- Minutes recording dividend declarations and rationale
6. Strategies that still work
- Salary to working family member (reasonableness, not TOSI)
- Spousal RRSP contributions (s. 146(5.1))
- Pension income splitting at 65 (s. 60.03)
- Prescribed-rate loans (TOSI doesn't reach attribution on legitimate loans at the prescribed rate)
- LCGE multiplication on sale where structure supports it
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