TOSI Rules in Canada

Since the inception of tax year 2018, the Tax on Split Income (TOSI) rules have been in effect in Canada, targeting adult individuals who earn from a “related business.” Previously, a common tax strategy involved distributing dividends to family members with lower incomes, a practice particularly scrutinized when it involved minors under the “kiddie tax.” However, the scope has since broadened to encompass adults. 

A “specified individual” for TOSI purposes is essentially a Canadian resident at year-end, or at the time of their death within the tax year. Moreover, minors with at least one parent residing in Canada during the year also fall under this category. 

A “related business” refers to any enterprise where a family member—such as a spouse, parent, child, or sibling—is involved at any point during the year. This includes corporations, sole proprietorships, partnerships, and trusts. 

When TOSI rules are applicable, the income in question is taxed at the highest personal tax rate. However, there are exceptions that, if met, allow the income to be taxed at the individual’s marginal tax rate. 

TOSI extends beyond dividends to encompass all income from a related business, including capital gains, interest, or shareholder benefits. Notably, salaries that meet the “reasonableness” criteria are exempt from being considered split income. 

There are specific exceptions to TOSI: 

• Excluded Business: Income from a business in which an individual is actively engaged does not attract TOSI. Active engagement is defined as substantial, regular, and continuous involvement, quantified as at least 20 hours per week on average. 

• Excluded Shares: Income or capital gains from excluded shares held by individuals aged 25 or older are not subject to TOSI. Excluded shares are those in a corporation where the individual owns at least 10% of the voting shares and the corporation’s income is not primarily from professional services or another related business of the individual. 

• Reasonable Return: Payments to individuals aged 25 or older that represent a reasonable return based on their involvement in the business are not subject to TOSI. 
• Safe Harbour Capital Return: Individuals aged 18 to 24 receiving a return on contributed property that does not exceed a prescribed rate are exempt from TOSI. 

• Reasonable Return on Arm’s Length Capital: A reasonable return on property contributed as arm’s length capital by individuals aged 18 to 24 is not subject to TOSI. 

Examples of TOSI application include dividends paid to an adult child uninvolved in the family business or interest payments to a parent from a business started with a loan from them, provided the interest rate is reasonable. 

TOSI rules are intricate and typically require guidance from a corporate tax accountant or a professional tax service familiar with the nuances.