Who the tax on split income catches, the excluded business and excluded shares tests, the rules at ages 18, 25 and 65, a salary or dividends for a spouse or child, and what to keep on file, with every rule linked to the CRA or the Income Tax Act.
The tax on split income (TOSI) taxes certain income from a family business, mainly dividends from a private corporation, at the top personal rate instead of the family member’s own lower rate. It applies unless an exclusion fits. Family members 18 or older who work in the business an average of at least 20 hours a week, this year or in any five earlier years, are usually out. From age 25, owning at least 10% of the votes and value of a corporation that is not mainly a service business or a professional corporation also takes dividends out. Salary is never caught by TOSI, but it has to be reasonable for the work done.
What Is the Tax on Split Income?
The CRA describes tax on split income as a special tax on certain income received from a related business. It exists to stop what the CRA calls income sprinkling: moving income from a high-income owner of a private corporation to family members who pay tax at lower rates. Since the 2018 tax year it applies to adults as well as children.
When TOSI applies, the income is taxed at the highest rate from the first dollar. On Form T1206, Tax on Split Income for the 2025 tax year, the federal tax is 33% of split income, and the Alberta rate in the form’s provincial chart is 15%. The dividend tax credit, the disability tax credit and the foreign tax credit can still reduce it.
Split income mainly means:
- taxable dividends and shareholder benefits from shares of a private corporation, received directly or through a partnership or trust,
- interest on a loan to a private corporation, partnership or trust, when dividends from it would be caught,
- income from a partnership or trust that comes from a related business, and
- certain taxable capital gains on private company shares and on partnership or trust interests.
- Salary is not split income. The CRA’s income sprinkling FAQ says the TOSI rules do not apply to salary received by an individual.
- Public shares are outside it. Dividends on shares listed on a designated stock exchange and on mutual fund corporations are not split income, and neither is interest on a bank deposit.
- The family member reports it. TOSI is worked out on Form T1206 and claimed on line 40424 of the family member’s own return, and on line 61510 of their provincial form (AB428 in Alberta).
Who Is Caught by TOSI?
Under the CRA line 40424 page, TOSI generally applies when both of these are true:
- The person is a specified individual. That is anyone 18 or older and resident in Canada at the end of the year, or anyone 17 or under, resident in Canada at the end of the year, with at least one parent resident in Canada during the year.
- They have split income that is not an excluded amount. The exclusions are where the age rules below come in.
For adults, TOSI only reaches income from a related business. A business is related to a family member when a relative of theirs who lives in Canada (the CRA calls this person the source individual) is actively engaged in it, owns shares worth at least 10% of the fair market value of the corporation’s shares, or has an interest in the partnership that carries it on.
In plain English: if you own or run the business and your spouse, child, parent, brother or sister receives dividends from it, start from the view that TOSI applies, then check whether an exclusion fits. The CRA’s payroll page on related persons explains who counts as related under the Income Tax Act: family by blood (parents, children, grandchildren, brothers and sisters), by marriage or common-law partnership, and by adoption. It does not include aunts, uncles, nieces, nephews or cousins.
Which Rules Apply at Ages 18, 25 and 65?
The exclusions depend on the family member’s age at the end of the tax year. This is how the CRA’s line 40424 page and its income sprinkling FAQ set them out:
| Age at the end of the year | What can keep income out of TOSI |
|---|---|
| Under 18 | Very little. Dividends from the family corporation are taxed at the top rate. Income from property inherited from a parent is excluded. |
| 18 to 24 | Income from an excluded business (the 20-hour test), a safe harbour return or a reasonable return on capital they put in themselves, and income from certain inherited property. |
| 25 or older | Income from an excluded business, income from excluded shares, or an amount that is a reasonable return for their work, capital and risk. |
| Spouse of an owner 65 or older | Income that would be excluded if the 65-year-old spouse had received it is excluded for the other spouse too. |
| Any age | Taxable capital gains on qualified small business corporation shares or qualified farm or fishing property (for a child under 18, not on a sale to a relative), gains on death, and income from property received under a separation agreement or court order. |
Two things trip people up. First, the age that counts is the age on December 31, not on the day the dividend is paid. Second, a child under 18 can still earn a salary for real work in the business: TOSI does not apply to salary at any age.
How Do the Excluded Business and Excluded Shares Tests Work?
The CRA’s guidance on the split income rules for adults explains each exclusion with worked examples. These are the four an adult family member is most likely to rely on:
Excluded business
- Actively engaged in the business on a regular, continuous and substantial basis, this year or in any five earlier years
- An average of at least 20 hours a week while the business operates counts automatically, and the five years do not have to be in a row
Excluded shares
- You own the shares directly, with at least 10% of the votes and 10% of the value
- Less than 90% of the corporation’s business income is from services, it is not a professional corporation, and its income does not come from another related business
Reasonable return
- The amount is reasonable for the work you do, the property you put in and the risks you take
- What you have already been paid from the business is counted too
Capital you put in
- A safe harbour return at the prescribed interest rate on property you contributed to the business
- Or a reasonable return on your own arm’s length capital: not borrowed, not given by a relative, not earned from the business
The 20-hour test. The CRA’s line 40424 page gives an example: someone who works 30 hours a week for 20 weeks in a business that operates 25 weeks a year meets the test. Below 20 hours, being actively engaged is a question of fact, so it can still be met, but it is harder to show.
The 90% services test. The CRA’s excluded shares page says it uses gross business income, meaning revenue before expenses, for the corporation’s previous tax year (or the current year for a new corporation). A consulting firm that earns 95% of its revenue from services does not qualify. Professional corporations of accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors never qualify, however their income is made up.
Reasonable return. The CRA says it does not intend to substitute its own judgment of a reasonable amount where there has been a good faith attempt to set one using the criteria. That is why the paperwork matters (see below).
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Salary or Dividends for a Spouse or Child: What Is the Difference?
Salary. TOSI never applies to it. The corporation can deduct it only to the extent it is reasonable in the circumstances (Income Tax Act, section 67), so pay what the work is worth: what you would pay someone else for the same hours and tasks. A salary also means payroll. The CRA’s page on employing a family member says to:
- deduct income tax as for any other employee,
- deduct CPP contributions as for any other employee, unless the employee is your spouse or common-law partner and the pay cannot be deducted as an expense,
- check whether the job is insurable for EI: work between related persons may not be, unless a similar contract would have been made with someone at arm’s length, judged on the pay, hours, duration and importance of the work, and
- report the pay on a T4 slip, with box 28 marked exempt from EI if the job is not insurable.
Dividends. No payroll is needed, but dividends to a family member are split income unless one of the exclusions above fits. Without one, the family member pays tax at the top rate and the point of paying them is lost.
For how the choice works for you as the owner, see our guide Salary or Dividends? How to Pay Yourself From Your Alberta Corporation.
What Do the CRA's Own Examples Show?
The CRA guidance works through examples. Four of them answer the questions owners ask most:
- Spouse with shares, no work in the business. Two spouses over 25 each own 50 shares of their own class in a computer components supplier. One runs it full time; the other has never worked in it. Equal dividends to both are not caught: the second spouse’s shares are excluded shares.
- Student at 19 or 20. A 19-year-old does clerical work one day a week (about 350 hours a year), and a 20-year-old works full time only in the summer (600 hours). Dividends paid to them through a family trust are caught, even though the amounts match what staff earn for the same work. Paid as salary, the same amounts are not caught. Once each is 25 or older, the same payment would be a reasonable return for their work.
- Spouse who keeps the books. In a professional corporation, a spouse over 25 works under 20 hours a week on the bookkeeping. A dividend close to what an outside bookkeeper was paid is a reasonable return and is not caught.
- Retired owner over 65. An owner over 65 owns 95% and the spouse, 60, owns 5% of a company that now holds investments. Dividends to the spouse are not caught, because they would have been excluded for the owner, who is over 65.
The examples are the CRA’s, summarized here. The outcome for your family depends on its own facts.
What Should You Document?
Most TOSI exclusions are about facts: hours, ownership, revenue and contributions. Keep the proof as you go:
- Hours worked. The CRA’s FAQ says timesheets, schedules or logbooks kept by the person or the business are enough to show the hours, and payroll records help where the person is also paid a salary.
- Share ownership. The share register and minute book showing who owns which class directly, with the votes and value of each.
- Revenue mix. The corporation’s gross business income for the previous year split between services and goods, for the 90% test.
- Reasonable return. The tasks, the hours, the pay the same work earns elsewhere, any money or property the person put in, any loans they co-signed or secured, and what they have been paid before. These are the factors in the CRA guidance.
- The return itself. The line 40424 page says to keep all of the family member’s documents in case the CRA asks to see them, and to attach Form T1206 to a paper return.
- Check the age they will be on December 31.
- Check the work. Do they average 20 hours a week, now or in five earlier years, and can you show it?
- Check the shares. At 25 or older, do they own at least 10% of the votes and value directly, in a corporation that is not mainly services or a professional corporation?
- Check the alternative. Would a reasonable salary for real work be simpler?
How Can We Help With Paying Your Family?
Proactive tax planning is part of our corporate and personal tax work. Before year-end we look at how you pay yourself and your family, which TOSI exclusion fits each person and what records support it. We then prepare the corporation’s T2 and the family’s personal returns, including Form T1206 where TOSI applies. Fees are fixed and quoted up front.
See our T2 corporate tax and personal tax services, or, if you are thinking about putting a spouse or child on the payroll or the share register, see our packages.
Frequently Asked Questions
Does TOSI apply to a salary I pay my spouse or child?
No. The CRA says the TOSI rules do not apply to salary. The corporation can deduct the salary only if it is reasonable for the work done, and the normal payroll rules apply: income tax, CPP and, if the job is insurable, EI, all reported on a T4.
My spouse does not work in the business. Can they receive dividends without TOSI?
Possibly. If your spouse is 25 or older and directly owns at least 10% of the votes and value, in a corporation that earns less than 90% of its business income from services and is not a professional corporation, the dividends can come from excluded shares. Once you are 65 or older, amounts that would be excluded for you are also excluded for your spouse.
Is my 19-year-old who works part-time in the business caught?
Dividends usually are, unless they average at least 20 hours a week while the business operates, or put their own capital into it. In the CRA’s examples, a 19-year-old working about 350 hours a year and a 20-year-old working 600 hours in the summer were both caught on dividends, but not on salary.
How is the 20 hours a week worked out?
It is an average over the part of the year the business operates, so a seasonal business only counts its operating weeks. Meeting it in any five earlier years also works, and the years do not have to be in a row. Keep timesheets, schedules or logbooks to show it.
How is TOSI reported?
The family member works it out on Form T1206, Tax on Split Income, and claims it on line 40424 of their return and on line 61510 of their provincial form (AB428 in Alberta). For the 2025 tax year the federal rate on the form is 33%, and the Alberta rate is 15%.
Reviewed on 26 October 2026. Tax on split income rules, ages, rates and payroll rules in this article are from the Canada Revenue Agency and the Income Tax Act (Government of Canada, Justice Laws website), linked beside each fact and listed below.
T2 Corporate Tax
Corporate tax returns for Canadian corporations, with proactive tax planning on how owners and family are paid
T1 Personal Tax
Personal tax returns for owners and family members, including dividends, T4 income and Form T1206
Sources
- Canada Revenue Agency, Line 40424, Federal tax on split income (page dated 2026-01-20, checked 26 October 2026)
- Canada Revenue Agency, Guidance on the application of the split income rules for adults (page dated 2019-07-10, checked 26 October 2026)
- Canada Revenue Agency, Frequently asked questions, Income sprinkling (page dated 2024-09-24, checked 26 October 2026)
- Canada Revenue Agency, Tax on split income, Excluded shares (page dated 2019-07-10, checked 26 October 2026)
- Canada Revenue Agency, Form T1206, Tax on Split Income, 2025 (Part 2 and Chart C) (page dated 2026-01-20, checked 26 October 2026)
- Canada Revenue Agency, Employee who is a family member or a related person (page dated 2026-07-22, checked 26 October 2026)
- Government of Canada, Income Tax Act, section 120.4 (Justice Laws website) (current to 2026-09-30, checked 26 October 2026)
- Government of Canada, Income Tax Act, section 67 (Justice Laws website) (current to 2026-09-30, checked 26 October 2026)
