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Understand what are related businesses and excluded amounts

Understand what counts as a related business and how certain types of income may be excluded from the Tax on Split Income (TOSI)

If you or your family earn income from a private corporation, trust, partnership, or rental arrangement, the Tax on Split Income (TOSI) rules may apply. But not all income is caught under these rules. The CRA allows specific exclusions—called excluded amounts—that allow some family members to receive income from a related business without triggering the highest marginal tax rate.

Understanding what qualifies as a related business and which income types are excluded is essential for properly reporting income and avoiding unexpected taxes.

What Is a Related Business?

Under TOSI rules, a related business is a business in which a family member is significantly involved. The CRA considers a business related to an individual if:

  • A related person (spouse, parent, sibling, child) is actively engaged in the business

  • The individual owns shares or partnership interests in a company where a relative is involved

  • The business income flows through a trust or partnership connected to a relative

Related businesses include:

  • Family-run corporations

  • Real estate companies where ownership is shared among family members

  • Trusts holding shares in a family business

  • Partnerships that allocate income among relatives

If you receive income from a related business but are not actively involved, you may be subject to TOSI unless an excluded amount applies.

What Are Excluded Amounts?

An excluded amount is a type of income that meets specific CRA criteria and is not subject to TOSI. Whether income is excluded depends on the recipient’s age, involvement in the business, and type of income received.

Here are the main types of excluded amounts:

1. Excluded Business Income

Income is excluded if the recipient is age 18 or older and works in the business an average of 20 hours per week or moreduring the year or in any five previous years.

  • Applies to salaries, dividends, and trust allocations

  • CRA may ask for time logs or other proof of work

2. Excluded Shares

For individuals over age 24, dividends received from shares of a company that meets the excluded shares test are excluded if:

  • Less than 90% of the business’s income is from services

  • The individual owns at least 10% of the votes and value of the shares

  • The corporation is not a professional services firm (like law or accounting)

3. Reasonable Return

For individuals aged 25 and older, income is excluded if it represents a reasonable return based on:

  • Labour provided

  • Capital contributed

  • Level of risk assumed

  • Other factors like previous contributions and payment terms

4. Safe Harbour Capital Return

For individuals aged 18–24, income is excluded if it’s based on a reasonable return on arm’s-length capitalcontributed. This prevents TOSI when a younger adult invests their own money, not money received from family.

5. Inherited Property or Deemed Dispositions

If income or gains are received as a result of death, inheritance, or divorce, some exclusions may apply, especially where the deceased met the exclusion conditions.

Tip: To support claims that income is excluded from TOSI, keep detailed documentation such as payroll records, hours worked, capital investment details, shareholder agreements, and records of capital risk. These records can make or break your case if CRA reviews your return.

Summary of Common Excluded Amounts

Excluded Amount Type Age Requirement Key Conditions TOSI Applies?
Excluded business income 18 or older Average of 20+ hours worked per week No
Excluded shares Over 24 Owns 10%+ of voting and value; business not service-based No
Reasonable return 25 or older Return is proportionate to labour, capital, or risk No
Safe harbour capital return 18 to 24 Arm’s-length capital contribution only No
Inherited property Any age Income tied to property previously qualifying for exclusion Often excluded
 

Important: Even if you believe income qualifies as an excluded amount, the CRA may reassess if records are not sufficient or if ownership thresholds are not met precisely. Do not assume that a family member automatically qualifies—every test must be carefully evaluated each tax year.