Tax on Split Income (TOSI)

Tax on split income (“TOSI”) prohibits tax planning by splitting the income of a business between multiple family members. This tax applies to a specified individual who receives “split income”. In such a case, income tax computed at the top marginal rate is imposed. Although TOSI originally applied only to income splits with individuals under the age of 18, the rules were substantially expanded in 2018 to include adult family members.

The rules are very complicated and with numerous exceptions.  In general, it applies to a “specified individual” who is a resident in Canada or for an individual who is under 18 & has a parent who resides in Canada.  If the income is subject to TOSI, the only tax credits permitted are disability tax credits, dividend tax credits, and the foreign tax credits. The same income is not subject to the regular attribution rules if it falls under TOSI.

Examples of split income structures:

• Family-run corporations where family members receive dividend income on shares in the corporation, either directly or through a trust or partnership, without attracting attribution.
• A structure that utilizes a management services partnership or trust to provide its services to a professional practice or other business in which a parent or spouse was involved. The spouse or child would be passive members of the partnership or beneficiaries of the trust.  The business income earned by the partnership or trust can be flowed out to the spouse or child, who are taxed at their marginal rates.

The definition of split income is very broad, however there are many exceptions that will exclude income from the application of TOSI, such as: Excluded amounts, related business exceptions, excluded business, safe harbour capital return, reasonable return, arm’s length capital, excluded shares, spouse or common-law partner aged 65 and older, etc.

As you can see from this laundry list, TOSI is not straightforward and requires detailed analysis by looking into all the individuals in the family – to figure out who is the source person and individuals whom may be subject to the TOSI rules, their contributions in term of capital/labour, type of ownership, fair market value of the business, income sources (services or goods), inter-company services within the group that may have an effect on the exceptions, and how to determine the “reasonable return”.

Please contact our specialists if you would like to evaluate your current situation.

This article is intended for general information purposes only and does not constitute professional advice.  Income tax law and regulation change frequently and the content on this article may no longer reflect the current state of the law. If you have any specific questions, you should consult a professional services advisor or email us for further advice.