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Understand tax on split income (TOSI) and how to use the T1206 form

Understand when split income rules apply, who is affected, and how Form T1206 determines the additional tax at the highest marginal rate

The Tax on Split Income (TOSI) rules were introduced to limit income splitting among family members where little or no actual contribution to the income-generating business was made. When TOSI applies, the affected income is taxed at the top personal tax rate, removing the tax savings that might otherwise come from assigning income to a lower-income spouse or child.

The tool used to calculate and report this tax is Form T1206 (Tax on Split Income). Understanding when TOSI applies—and how to avoid it—is essential if your family earns income from a private corporation, trust, or partnership.

What Is Split Income?

Split income includes specific types of passive or investment income earned by a family member from a related business. This is not ordinary employment or investment income—it comes from arrangements that allow income to be diverted to a family member who may not have contributed meaningfully to the business or investment.

Examples of split income include:

  • Dividends from private corporations received by family members

  • Shareholder benefits or other payments from related businesses

  • Income from a partnership or trust where another family member actively runs the business

  • Rental income from property that is rented to a family-run corporation

  • Capital gains from selling shares in a private corporation that are attributed to a related business

This income is subject to TOSI unless it qualifies for an exception.

Tip: If you are receiving income from a family business, consider whether your involvement can qualify you for an exclusion from TOSI. Document hours worked, decisions made, and any capital contributed. This documentation is critical if CRA asks why the income should not be taxed at the top rate.

Who Does TOSI Apply To?

TOSI applies to certain individuals who receive passive income from a related business but do not participate in the business enough to justify the income.

You are most likely affected by TOSI if:

  • You are under 18 and receive dividends or trust income from a family-owned corporation

  • You are 18 to 24 years old and the income is not based on a substantial capital contribution or active involvement

  • You are over 24 but do not contribute labour, capital, or decision-making to the business

  • You are a spouse or relative of someone significantly involved in a related business and receive income from that business

However, the CRA allows for excluded amounts, which are types of income that are not subject to TOSI.

TOSI Overview by Age and Involvement

Recipient TOSI Likely Applies? Exclusions Available?
Minor child (under 18) Yes No – all income from related businesses is included
Age 18–24, passive income Likely Yes – if capital contributed is arm’s-length
Over 24, not active in business Possibly Yes – based on reasonable return or active involvement
Active business participant No Income fully excluded if meets criteria

The application of TOSI is based on facts and contribution, not just age or relationship. CRA reviews each situation based on involvement, capital invested, and reasonableness of the income.

How Does Form T1206 Work?

Form T1206 is where individuals calculate how much of their income is subject to the split income tax. The form guides you through:

  • Identifying types of income received (e.g., dividends, capital gains, trust allocations)

  • Determining which amounts are excluded under CRA rules

  • Calculating the net amount of split income

  • Applying the highest marginal tax rate on that income

  • Determining additional tax owed due to TOSI

This amount is then reported on your T1 tax return, increasing your overall tax payable.

Important: Do not assume that income earned by a family member from a business is automatically exempt. If attribution rules or TOSI apply and you have not completed Form T1206 properly, CRA can reassess the return and impose back taxes, interest, and penalties. Always evaluate the nature of each income stream and whether an exclusion applies.

How to Avoid TOSI

There are several common excluded amounts that are not subject to TOSI:

  • Safe harbour capital returns: For individuals aged 18–24, if they contribute capital acquired from an arm’s-length source, income on that capital may be excluded.

  • Excluded business income: If the family member works an average of 20+ hours per week in the business during the year (or in 5 prior years), income is excluded.

  • Reasonable return: For individuals over 24, income may be excluded if it reflects a reasonable return on the capital, risk, and labour provided.

  • Inheritance or death-related income: Income received from certain estates or due to death may be excluded from TOSI.