Which types of income are subject to TOSI
Learn what types of income are caught under Canada’s Tax on Split Income (TOSI) rules and when they apply to family arrangements
The Tax on Split Income (TOSI) rules apply to specific types of income earned by certain family members—most commonly minors or lower-income adults—through private corporations, partnerships, and trusts. These rules are meant to prevent income-splitting strategies that shift income to a family member who didn’t contribute meaningfully to the business or investment.
Understanding which types of income are considered “split income” is critical to determine whether TOSI applies and whether Form T1206 must be filed.
Common Types of Income Subject to TOSI
Not all investment or passive income is caught by the split income rules. TOSI only applies to income that flows from a related business or arises from arrangements involving family members. Below are the most common types of income that may be classified as split income.
1. Dividends from Private Corporations
When a private corporation pays dividends to a family member—especially one who is not active in the business—that dividend may be subject to TOSI.
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Applies to shares in Canadian-controlled private corporations (CCPCs)
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Income from non-voting or discretionary shares is especially scrutinized
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TOSI may not apply if the family member is actively engaged or made a reasonable capital contribution
2. Shareholder Benefits
These are non-cash or below-market-value perks provided to a shareholder or their family, such as:
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Free use of a company car or cottage
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Loans at low interest rates
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Personal expenses paid by the business
If the benefit flows to a family member with no business involvement, it may be treated as split income.
3. Partnership or Trust Income from a Related Business
If a family member receives income through a trust or partnership structure tied to a related business, that income is often caught under TOSI unless an exclusion applies.
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Income from discretionary family trusts is particularly at risk
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Applies even if the business is structured through a trust to reduce taxes
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Relevant if the trust or partnership holds shares in a private corporation
4. Rental Income from a Related Business Arrangement
When rental income is received for property used by a related business, and the income is allocated to a non-involved family member, it may be reclassified as split income.
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Especially relevant when a family member owns property rented to a private company run by another family member
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Applies if the income recipient did not contribute labour or capital
5. Capital Gains from Disposing of Private Company Shares
Capital gains from selling shares in a related private corporation are considered split income if:
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The shares are sold to a non-arm’s-length party
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The recipient is a minor or uninvolved adult
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The gain is recharacterized under “anti-avoidance” provisions
TOSI converts the gain into split income and taxes it at the highest rate.
Tip: Not all family business income triggers TOSI. If the family member contributes time (20 hours per week or more), made an arm’s-length capital investment, or is over age 24 and receives a reasonable return, the income may be excluded. Keep detailed records of participation and investment contributions to support your case.
Summary of Split Income Types
| Income Type | Example | When TOSI May Apply |
|---|---|---|
| Dividends from private corporations | Paid to spouse or adult child not in the business | When no labour or capital is contributed |
| Shareholder benefits | Use of company assets by family member | If family member is not actively involved |
| Partnership or trust income | Allocated from family trust | If from a business owned or operated by a relative |
| Rental income | From leasing property to a family-owned business | If recipient is not involved in the arrangement |
| Capital gains on private company shares | Sale of shares to a related person | If the seller is a minor or uninvolved adult |
Important: Even if a tax slip such as a T3 or T5 is issued in your name, the CRA can still reclassify the income as split income based on the source. You are responsible for understanding where the income comes from and whether TOSI rules apply. Misreporting or ignoring attribution rules can lead to reassessments and penalties.