A Practical, Plain-Language Guide for Canadian Family Businesses

When the federal government expanded the Tax on Split Income (TOSI) rules back in 2018, a lot of business owners panicked. Many assumed income splitting was gone for good.
 It wasn’t. The rules didn’t slam the door shut—they just made the doorway narrower.

By 2025, the real challenge isn’t deciding whether income splitting is allowed. It’s figuring out when it’s allowed, and whether your family’s involvement meets the CRA’s requirements.

If you operate a family business or hold shares in a private corporation, your goal is simple: make sure every dollar paid to a family member reflects real work, real ownership, or real contribution.

What TOSI Tries to Prevent

TOSI rules are meant to stop “income sprinkling”—paying business income to relatives who didn’t meaningfully help run the business.

If the CRA decides TOSI applies, the income is taxed at the highest marginal tax rate, even if the person normally earns very little.

TOSI can apply to:

• shareholder benefits
• partnership allocations
• trust income
• non–arm’s-length capital gains

When TOSI Doesn’t Apply: The Main Exemptions

A family member (“specified individual” under the Income Tax Act) can still receive income without triggering TOSI if any of the CRA-recognized exemptions apply.

1. Reasonable Return / Reasonable Compensation (18+)

If a family member actually works in the business and you pay them what someone else would reasonably earn for the same job, TOSI may not apply.

The CRA looks at:

• What the person did
• Their skills and experience
• Hours worked
• Market pay for similar roles

This exemption is often the cleanest and most defensible.

2. Excluded Shares (Age 25+)

Some adults can receive dividends from “excluded shares” if they own:

• 10% or more of votes, AND
• 10% or more of fair-market value, AND
• The corporation earns less than 90% from services, AND
• Less than 10% of income comes from a related business involving a family member’s services

Professional corporations cannot use this exemption.

3. Excluded Business (The “Actively Engaged” Test)

A family member avoids TOSI if they were meaningfully involved in the business for at least five years (non-consecutive is fine).

CRA’s guidance: CRA Folio S1-F2-C1 – TOSI & Work Test, the 20-hours-per-week benchmark helps, but it isn’t a guaranteed safe harbour.

4. Ages 18–24 and Inherited Property

CRA has stricter rules for ages 18–24, focusing on capital contributed at arm’s length.

Inherited property generally keeps its original TOSI-exempt status if the property came from someone other than a spouse.

How Families Use TOSI-Compliant Strategies in 2025

Put Family Members on Payroll for Real Work

To rely on “reasonable return,” you must document the work:

• job descriptions
• hours worked
• pay benchmarking
• proper payroll records

Issue Excluded Shares to Adult Children (If They Qualify)

If your corporation meets the excluded-share criteria, adult children (25+) may receive dividends without TOSI.
 Service-based companies and professional corporations generally won’t qualify.

Take a Closer Look at Past Family Contributions

If someone worked in the business for at least five years—even intermittently—they may meet the “excluded business” exemption.

Proof matters: older schedules, invoices, emails, and task logs can all help.

Common Mistakes That Don’t Avoid TOSI

These no longer work:

• Giving a token share to a spouse or child
• Paying inflated wages for minimal work
• Adding a name to an investment account
• Relying solely on a shareholder agreement

These are the same issues that routinely come up in CRA audits.

Building a TOSI-Safe Structure

1. Keep Detailed Records

The CRA relies heavily on documentation. Keep proof of:

• work performed
• hours
• invoices
• pay comparisons
• historical involvement

2. Review Your Share Structure Before Issuing Dividends

Before paying dividends, review:

• excluded-share eligibility
• business revenue mix
• voting and ownership thresholds
• related-party service involvement

3. Work with Advisors Who Understand TOSI

TOSI includes some of the most technical rules in the Income Tax Act. Terms like “reasonable return,” “actively engaged,” and “excluded shares” are open to interpretation.

Final Thoughts

TOSI didn’t kill income splitting—it simply raised the bar.

Families who still benefit from income splitting are usually the ones who:

• Treat relatives like real contributors
• Keep detailed records
• Structure ownership intentionally
• Seek advice early

Income splitting is still possible—and often worthwhile.
 You just need the evidence, the structure, and the right guidance to make it work.

This piece is for information only. The TOSI framework is complex and full of detailed exceptions and anti-avoidance provisions. Always consult a qualified Canadian tax professional before implementing any income-splitting strategy.