How do the TOSI rules work, and which family members are excluded?
The TOSI rules in section 120.4 tax split income at the top federal rate, 33% for 2026, with only the dividend, foreign and disability tax credits allowed. Split income covers private company dividends, related business partnership income, certain gains and interest. Age based exclusions, like an excluded business or excluded shares, take an amount out.
Which exclusions apply at each age
TOSI applies to a specified individual's split income unless the amount is an excluded amount, and most exclusions depend on age laws-lois.justice.gc.ca. The CRA groups them the same way on its line 40424 page
canada.ca.
| Excluded amount | Under 18 | 18 to 24 | 25 and over |
|---|---|---|---|
| Income not derived from a related business | No | Yes | Yes |
| Income from an excluded business | No | Yes | Yes |
| Safe harbour capital return | No | Yes | No |
| Reasonable return on arm's length capital only | No | Yes | Use the full reasonable return |
| Income or gains from excluded shares | No | No | Yes |
| Reasonable return (work, capital, risk, past payments) | No | No | Yes |
| Property inherited from a parent, or from anyone if a full time post secondary student or eligible for the disability tax credit | Yes | Yes | No |
| Property received under s. 160(4) on a marriage or common law breakdown | Yes | Yes | Yes |
| Taxable capital gain from the deemed disposition on death, s. 70(5) | Yes | Yes | Yes |
| Gain on qualified small business corporation shares or qualified farm or fishing property | Yes, unless deemed a dividend under s. 120.4(4) or (5) | Yes | Yes |
The age bands key off the start of the year, not the client's birthday. The Act says "attained the age of 17 years before the year" for the 18 and over exclusions and "attained the age of 24 years before the year" for excluded shares and the reasonable return, so each band opens in the calendar year your client turns 18 or 25 laws-lois.justice.gc.ca.
What counts as split income
Split income is built from the sources listed in s. 120.4(1), all routed through a private business connected to a related person canada.ca:
| Source | Caught when |
|---|---|
| Taxable dividends and shareholder benefits | The shares are not listed on a designated stock exchange and are not mutual fund corporation shares, held directly or through a partnership or trust |
| Partnership or trust income | It comes from a related business or from certain rental activities |
| Interest and other debt income | Other amounts from the same debtor would be split income (listed debt, bank and credit union deposits and certain government debt are excluded) |
| Taxable capital gains | From disposing of private company shares, or partnership, trust or debt interests, after 2017 |
Salary isn't split income. The CRA's adult guidance describes the target as dividends and interest, but not salary, from a related business canada.ca. A related business is one where a related Canadian resident (the source individual) is actively engaged on a regular basis, or owns shares worth 10% or more of the corporation's total fair market value
laws-lois.justice.gc.ca.
Excluded business and excluded shares
An excluded business is one your client was actively engaged in on a regular, continuous and substantial basis in the year or in any five prior taxation years laws-lois.justice.gc.ca. Averaging at least 20 hours a week during the part of the year the business operates meets the test for that year, and your client doesn't have to work every week
canada.ca. Gains from property qualify through this route only if the five year test is met.
Excluded shares are only for clients 25 and over, and every condition must hold when the income is received canada.ca:
| Condition | Detail |
|---|---|
| Services test | Less than 90% of the corporation's gross business income came from services, measured on its previous tax year (a new corporation uses the current year) |
| Not a professional corporation | No accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor practice |
| Votes and value | Your client directly owns shares with 10% or more of the votes and 10% or more of the fair market value |
| Related business income | All or substantially all of the corporation's income isn't derived from another related business |
Two traps show up often. The shares must be owned directly, so shares held through a family trust don't count. And the services test looks back a year: in the CRA's plumbing example, 95% service income in 2017 failed the 2018 dividends, while 75% in 2018 let the 2019 dividends qualify canada.ca.
Reasonable return and the safe harbour for 18 to 24
For a client 25 or over, an amount is excluded if it's reasonable given their relative contribution compared with each source individual: work performed, property contributed, risks assumed, total amounts already paid to them and any other relevant factor laws-lois.justice.gc.ca. The CRA says it generally won't substitute its own judgment where the taxpayer made a good faith attempt at a reasonable amount, but you should be ready to support it
canada.ca.
A client aged 18 to 24 gets two narrower options. The first is a reasonable return based only on arm's length capital, meaning property that wasn't borrowed, wasn't earned from a related business and wasn't transferred from a related person other than on death. The second is the safe harbour capital return: the highest Regulation 4301(c) prescribed rate for any quarter in the year, times the fair market value of property your client contributed to the business, prorated by the days it was used laws-lois.justice.gc.ca.
That 4301(c) rate is the one used for low interest shareholder and employee loan benefits, 3% in every quarter of 2026 canada.ca. A 20 year old who contributed $40,000 and left it in the business all of 2026 can receive up to $40,000 × 3% = $1,200 free of TOSI. Contributed for 183 days, the cap is $40,000 × 183/365 × 3% = $601.64. See the full quarterly table on CRA prescribed interest rates for 2026.
Worked example: a $30,000 dividend to a 22 year old
Your client's daughter is 22, studies full time and doesn't work in the family company. The parent owns all the shares. She receives a $30,000 non eligible dividend in 2026. She's under 25, so excluded shares and the general reasonable return aren't available, and she contributed no capital, so TOSI applies. The 15% gross up comes from s. 82(1)(b) laws-lois.justice.gc.ca and the federal dividend tax credit is 9/13 of the gross up under s. 121
laws-lois.justice.gc.ca.
| Step | Under TOSI | If the dividend were excluded |
|---|---|---|
| Taxable dividend ($30,000 × 1.15) | $34,500 | $34,500 |
| Federal rate | 33% | 14% |
| Federal tax before credits | $11,385.00 | $4,830.00 |
| Dividend tax credit ($4,500 × 9/13) | $3,115.38 | $3,115.38 |
| Federal tax | $8,269.62 | $1,714.62 before the basic personal amount |
TOSI costs $6,555 more federally before her basic personal amount is even counted, and that credit can't touch the TOSI figure. Under s. 120.4(3) the only credits allowed against it are the disability tax credit, the dividend tax credit and the foreign tax credit on the split income laws-lois.justice.gc.ca. The rates come from the CRA's 2026 bracket table: 14% up to $58,523 and 33% above $258,482
canada.ca. Provincial TOSI comes on top. For the gross up mechanics, see dividend gross up for 2026.
Spouses, death and marriage breakdown
If your client's spouse or common law partner turned 65 in the year or earlier, any amount that would be excluded in the spouse's hands is excluded in your client's hands too. The Act tests it as the spouse having "attained the age of 64 years before the year" laws-lois.justice.gc.ca. In the CRA's Example 12, a 60 year old received dividends from a corporation in which the spouse, over 65, held excluded shares, and the dividends were excluded
canada.ca.
On death, the same deeming covers an amount that would have been excluded for a spouse who died. For an heir in the 18 and over band, property acquired as a consequence of a death also carries over the deceased's contributions and years of activity in the business, and the deceased's age for the excluded shares and reasonable return tests, so an heir can rely on the deceased's five years laws-lois.justice.gc.ca.
On a breakdown, income from property transferred under s. 160(4) through a separation agreement or court order is excluded at any age, and spouses living separate and apart at year end because of the breakdown are deemed not related laws-lois.justice.gc.ca.
Sources
Which form calculates TOSI, and where does it go on the return?
Does selling qualified small business corporation shares trigger TOSI?
Usually not. A taxable gain on qualified small business corporation shares or qualified farm or fishing property is an excluded amount, unless it would be deemed a dividend under s. 120.4(4) or (5), which catches a minor selling private shares to a non arm's length person laws-lois.justice.gc.ca. The lifetime capital gains exemption works alongside that exclusion.
Can an owner over 65 pay dividends to a younger spouse without TOSI?
Yes, if the dividend would be an excluded amount had the owner received it, for example because the owner held excluded shares or ran an excluded business laws-lois.justice.gc.ca. The spouse's own age doesn't matter.
Does TOSI apply to a salary paid to a family member?
No. The CRA's adult guidance describes split income as dividends and interest from a related business, but not salary canada.ca. TOSI starts to matter when the family member is paid through dividends, interest or gains instead.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.