What Is Tax on Split Income (TOSI)? — A Clear Guide
TOSI (Tax on Split Income) is a set of rules designed to stop “income sprinkling” — where business owners shift income to family members who haven't contributed to the business, to take advantage of lower tax brackets. TOSI often causes the split income to be taxed at the highest marginal rate unless exemptions apply. For technical detail and exceptions, the CRA’s TOSI guidance is the authoritative resource.
Why does TOSI exist?
Governments introduced TOSI to prevent wealthy business owners from minimizing taxes by paying dividends or other income to family members who do not meaningfully participate in the business. The rules ensure tax fairness and curb aggressive income-splitting maneuvers.
Who does TOSI apply to?
TOSI can apply to individuals who receive certain dividends, capital gains, or partnership income from a related business and who did not make a sufficient contribution (labour or capital) to justify the income. It is especially focused on adults and minors connected to family businesses.
Key consequences
When TOSI applies, the amount of split income is subject to tax at the highest marginal tax rate (federal + provincial combined), which severely reduces the benefit of sprinkling. Some credits may still be available to reduce tax, but the protection is limited.
Exceptions & excluded situations
TOSI has several exclusions and exceptions. For example, reasonable returns on capital contributions may be excluded in some cases; actively involved family members who provide bona fide labour can qualify for exclusions; and bona fide business arrangements with arm’s-length terms can also avoid TOSI. TOSI does NOT apply to legitimate pension income splitting between spouses.
Practical examples
Bad outcome: A business owner pays dividends to an adult child who does not work in the business — CRA may apply TOSI and tax those dividends at the highest rate.
Better outcome: A spouse actively works in the family business and is paid a salary or dividends that reflect a reasonable return for the labour contributed — TOSI exclusions may apply.
What to do if TOSI might affect you
- Review whether the income is from a related business and whether the recipient made a meaningful contribution.
- Document labour contributions (hours, role, responsibilities) if family members are paid for actual work.
- Model outcomes using detailed calculators and speak to a tax professional about corporate structures and legal planning.
Where to read the official rules
CRA’s pages on TOSI and completing line 40424 provide the legal guidance and examples. If your situation involves corporate dividends, partnership income, or family businesses, read CRA’s TOSI guidance carefully.
Wrap-up
TOSI makes it risky to rely on simple income sprinkling as a tax plan. For couples who are retirees, pension income splitting remains a safe, low-risk way to reduce household taxes — and the Retirementize tool models pension splitting automatically to show realistic outcomes.