The logic of income splitting is simple and powerful: Canada taxes individuals at progressive rates, so the same dollar is taxed less in the hands of a family member in a low bracket than in yours at the top. For incorporated owners, the classic move was to make a spouse or adult child a shareholder and pay them dividends.

In 2018, the federal government largely shut that door with the expanded tax on split income (TOSI). Many owners still believe the old strategy works as it did. It doesn't — and the cost of getting it wrong is steep, because caught income is taxed at the highest marginal rate with no graduated benefit at all.

TL;DR — The Short Version
  1. TOSI taxes "split income" paid to family members at the top marginal rate — wiping out the benefit of splitting — unless a specific exclusion applies. It mainly targets dividends and similar amounts, not reasonable salary.
  2. Paying a reasonable salary for real work still works. Salary isn't split income — but it must be reasonable for the work actually performed, or the corporation's deduction can be denied.
  3. The key exclusions for adults include: the recipient is actively engaged in the business (an "excluded business"), owns "excluded shares" (generally 10%+ of votes and value of a non-services, non-professional corporation), receives a reasonable return, or the owner is 65+ (a spouse exception aligned with pension splitting).
  4. Minors are almost always caught. Dividends sprinkled to children under 18 are TOSI in nearly all cases.
  5. It's now a documentation game. Whether an exclusion applies turns on facts — hours worked, share ownership, contribution — so the planning lives or dies on records.

Read on for what TOSI catches, the exclusions that still allow splitting, and why salary and dividends are treated so differently.

What Changed

From income sprinkling to TOSI

"Income sprinkling" described spreading a corporation's income across family members to use their lower tax brackets. Before 2018, an adult family shareholder could often receive dividends taxed at their own (low) rate, even if they did little for the business.

The expanded TOSI rules changed the default. Now, certain income — chiefly dividends and capital gains — received by a "specified individual" from a "related business" is automatically taxed at the top marginal rate, eliminating any splitting advantage, unless the amount fits one of several exclusions. The burden is effectively on you to land in an exclusion.

Source: Income Tax Act section 120.4 (tax on split income); CRA, Guidance on the application of the split income rules for adults.

The Salary Exception

Why a reasonable salary still works

Here's the distinction that trips people up: TOSI applies to dividends and similar amounts, not to salary. If your spouse or child genuinely works in the business, you can pay them a salary, deduct it, and it's taxed in their hands at their own rate — no TOSI.

The catch is an old one: the salary must be reasonable for the work actually done. Pay your teenager $60,000 to answer the occasional email and the CRA will deny the deduction as unreasonable. Pay a fair wage for real, documented work and it's a legitimate, effective way to split income.

Source: salary is outside the split-income definition in ITA section 120.4; reasonableness of amounts paid is governed by ITA section 67. Attribution rules in sections 74.1–74.5 can also apply to certain transfers to a spouse or minor.

The Exclusions

When dividends to family still escape TOSI

For adults (18+), several exclusions can take a dividend out of TOSI. The most useful for small-business families:

💪

Excluded business

The family member is actively engaged on a regular, continuous and substantial basis in the business — in the year, or in any five prior years. A common bright line is averaging 20+ hours a week.

📜

Excluded shares

An adult 25+ who owns shares representing 10% or more of the votes and value of the company may be excluded — but generally not for professional corporations or businesses whose income is mostly from services.

⚖️

Reasonable return

For those 25+, a return that's reasonable given their contributions of labour, capital, and risk can be excluded — a facts-and-circumstances test.

🎂

Owner is 65+

Amounts a business owner aged 65+ could have received without TOSI can be split with their spouse without TOSI — broadly aligning with pension income splitting in retirement.

Decision flow for paying family: reasonable salary for real work is not subject to TOSI. Dividends to family are taxed at the top rate under TOSI unless an exclusion applies, such as being actively engaged in the business, holding excluded shares, or the owner being 65 or older. PAYING FAMILY: WHERE IT LANDS Reasonable SALARY for real work Not split income Taxed at the family member's own rate ✓ DIVIDENDS to family Potential split income → TOSI exclusion applies no exclusion Excluded business / shares / 65+ → own rate Top marginal rate (TOSI) Minors are caught in almost all cases. Whether an adult exclusion applies turns on the facts.
Salary for genuine work sidesteps TOSI entirely. Dividends to family are taxed at the top rate unless they land in an exclusion — so the planning depends on real contribution and good records.
The Hard Cases

What almost never works anymore

Before You Set It Up

A practical checklist

Family compensation is one of the areas where good bookkeeping pays for itself — clean payroll records and a documented share structure are exactly what an exclusion stands on. That's part of what's included in every CDL plan, and you can estimate the cost in about a minute.

The Bottom Line

Splitting income is still possible — on the new terms

TOSI didn't kill income splitting; it killed lazy income splitting. Paying family for real work at a fair wage still works. So does sharing returns with a spouse or adult child who genuinely contributes labour, capital, or ownership in the right kind of business. What no longer works is moving money to relatives who aren't involved and hoping their low bracket applies.

If you set up a family share structure before 2018 and haven't revisited it, that's worth doing — the ground has shifted under it.

A Real-World Example

The dividends to the kid in residence

Meet Greg and Lina, who run an incorporated contracting business in Burlington. Years ago, on advice that was perfectly good at the time, they made their son a shareholder and paid him about $40,000 a year in dividends while he was away at university — a textbook income-split using his low tax bracket.

Post-2018, that plan no longer works. Their son doesn't work in the business and doesn't fit an exclusion (he's not yet 25 with excluded shares, and isn't actively engaged). So TOSI now taxes those dividends at the top marginal rate — the split saves nothing, and they've been carrying a structure that quietly stopped working. Meanwhile their daughter, who genuinely works about 25 hours a week in the office, could be paid a reasonable salary with no TOSI problem at all.

Same family, same business — but now only the child who actually works can be paid tax-efficiently.

What should have happened: pay family members for real work at a reasonable wage, and pressure-test any family dividends against the TOSI exclusions before relying on them — especially for a structure set up before 2018.

Paying — or thinking of paying — family from your business?

The line between effective and caught is all in the details. A 20-minute call is usually enough to tell whether your plan holds up under the TOSI rules.

Book a Free 20-Minute Call

This article is for informational purposes only and does not constitute tax or legal advice. The TOSI rules are complex and fact-specific, exclusions have detailed conditions, and the rules change. Consult a qualified professional before paying family members from your business or relying on an exclusion.

References

Primary sources, linked so you can read and interpret them yourself. Legislative links open on the official Justice Laws Website; agency links open on Government of Canada websites.