TAX ON SPLIT INCOME (TOSI) RULES

Neufeld Legal PC: Chris@NeufeldLegal.com - 403-400-4092 / 905-616-8864

When it comes to tax-driven structuring, Canadian taxpayers need to be aware of the Tax on Split Income (TOSI), which is intended to prevent families from reducing their overall tax burden by "splitting" income (such as dividends, certain capital gains, or income from a partnership or trust) from a related private business with family members in lower tax brackets. If TOSI applies, the income received by the family member is taxed at the highest marginal personal tax rate (which is over 50% in some provinces), eliminating the tax advantage of income splitting.

As such, Canadian taxpayers need to understand the core attributes that are intended to be dealt with by TOSI:

  • Applies to Split Income: TOSI primarily targets certain types of income received by a "specified individual" (usually a family member) from a "related business."

  • Highest Marginal Rate: When TOSI applies, the income is taxed at the highest federal tax rate, plus the highest provincial or territorial tax rate, effectively taxing the income at the top marginal rate.

TOSI Exemptions (Amounts Not Subject to TOSI)

The rules are complex, but key exceptions (or "excluded amounts") exist, which allow income splitting without triggering the highest tax rate. The availability of these exceptions often depends on the age and involvement of the family member receiving the income:

  • Excluded Business: The individual (age 18 or over) is actively engaged on a regular, continuous, and substantial basis in the business—generally working at least an average of 20 hours per week in the current year or in any five previous tax years.

  • Excluded Shares (Age 25+): The individual (age 25 or over) directly owns shares that meet specific criteria, including owning at least 10% of the votes and value of the corporation, and the corporation is not a professional corporation or primarily a services business.

  • Reasonable Return: For individuals aged 25 or over, income can be exempt if it represents a reasonable return on the work performed, property contributed, or risks assumed in support of the business.

  • Safe Harbour Capital Return (Ages 18–24): For individuals aged 18 to 24, a limited amount of income is exempt if it represents a return on capital contributed to the business, calculated using a prescribed interest rate.

  • Spouse of Business Owner (Age 65+): Income split with a spouse or common-law partner is generally exempt if the business owner is aged 65 or older and has contributed sufficiently to the business.

For knowledgeable and experienced tax law representation for family trusts and other tax and estate planning strategies, contact tax lawyer Christopher R. Neufeld at Chris@NeufeldLegal.com or call 403-400-4092 (Calgary, Alberta) / 905-616-8864 (Toronto, Ontario).

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