Income Splitting in Canada : What You Need to Know

The Tax on Split Income (TOSI) rules, which came into effect on January 1, 2019, have significantly impacted small business owners and families who previously benefited from income-splitting strategies. These changes have placed tighter restrictions on how income can be allocated among family members to reduce overall tax liability. 

Understanding how income splitting works and what exceptions still exist can help taxpayers legally reduce their tax burden while staying compliant with Canada Revenue Agency (CRA) regulations. 

What Is Income Splitting? 

Income splitting is a tax strategy used to shift income from a higher-earning family member to a lower-income family member. Since Canada follows a progressive tax system, this strategy reduces overall tax liability by ensuring more income is taxed at a lower rate. 

Common Income Splitting Methods 

✅ Spousal Loans – Lending money to a lower-income spouse and charging interest at the prescribed rate, allowing them to generate investment income at a lower tax rate. 

✅ Family Trusts – Allocating investment income to lower-income family members through a trust structure. 

✅ Investment Income Splitting – Holding investments in the names of lower-income family members so that dividends, interest, or capital gains are taxed at a lower rate. 

While these strategies can be effective, strict CRA regulations exist to prevent artificial income splitting. Improper use may result in penalties and reassessments. 

How Do the TOSI Rules Affect Income Splitting? 

Previously, TOSI applied only to minors (under 18 years old). Now, the rules extend to adults (18+) in many situations, significantly limiting income-splitting opportunities. 

What Changed? 

• Before 2018: Income splitting was an effective strategy for business owners to allocate dividends and business income to lower-income family members. 

• After 2018: Any split income received by family members over 18 years old is taxed at the highest marginal tax rate, unless an exemption applies. 

Who Is Affected? 

✅ Business owners who previously split income with family members.
✅ Family members receiving dividends from a private corporation.
✅ Individuals who do not meet the new TOSI exemptions. 

Income Splitting Exemptions Under TOSI 

There are several ways to avoid the highest marginal tax rate on split income. The following exemptions allow for continued income splitting in specific cases. 

1. Excluded Business Gains

• If a family member is 18-24 years old and has worked at least 20 hours per week in the business for the current tax year, their income is exempt from TOSI. 

• The 20-hour rule can also apply if met in any five previous tax years (even if not consecutive). 

• If the business operates part of the year, they only need to meet the requirement for that period. 

Example:
A child working at their parents’ bakery from age 19 to 24 qualifies for TOSI exemption. Even after stepping away, they can continue receiving dividends tax-free, as long as the payments are deemed reasonable. 

2. Excluded Shares

• If a family member is 25+ years old and owns at least 10% of a corporation (both in votes and value), dividends are exempt from TOSI. 

• However, this applies only to companies that earn less than 90% of their income from services and are not professional corporations (e.g., law firms, accounting firms, medical practices). 

3. Other Exemptions

• Business Owners Aged 65+ – Spouses can split business income without being subject to TOSI. 

• Gains from Selling Qualified Business Shares, Farm, or Fishing Property – These are exempt from TOSI. 

The Complexity of TOSI and Compliance Challenges 

The new TOSI rules are complicated, and their interpretation may evolve over time. Business owners must carefully document how family members contribute to the company and ensure their compensation is considered reasonable by CRA standards. 

❌ What can trigger TOSI? 

• Payments to family members who don’t actively contribute to the business. 

• Allocating dividends without a documented history of work in the company. 

• Failing to meet the exemption criteria. 

✅ How to stay compliant? 

• Keep detailed records of family members’ work contributions. 

• Structure ownership correctly to meet the 10% shareholding exemption. 

• Seek professional tax advice to re-align income-splitting strategies with TOSI exemptions. 

Frequently Asked Questions (FAQs) 

Who is eligible for income splitting in Canada? 

Eligibility depends on age, income type, and business structure. Seniors (65+) can split pension income, while business owners must meet specific TOSI exemptions. 

Is income splitting still allowed in 2024? 

Yes, but TOSI now applies to individuals over 18, limiting many previously available income-splitting strategies. 

Can seniors split income? 

Yes, seniors can split RRSP, RRIF, and pension income. Those under 65 can only split certain life annuities or inheritance payments. 

Does income splitting reduce taxes? 

Yes, when done correctly, it can significantly lower a household’s overall tax bill by shifting income to a lower tax bracket. 

Conclusion: Optimize Your Tax Strategy Under TOSI 

The new income-splitting rules make tax planning more complex, but exemptions still allow for strategic tax reduction. Business owners must carefully document family contributions, ensure dividends meet CRA standards, and explore alternative tax strategies where necessary. 

For expert tax planning, TOSI compliance, and income-splitting strategies, consult GYTD CPA Professional Corporation to protect your business and maximize tax efficiency.