CRA challenged my family income splitting through my private corporation — what is TOSI?

TOSI stands for the Tax on Split Income, a federal rule in the Income Tax Act that applies to certain income received by "specified individuals" from a private corporation. It is designed to prevent high-income earners from diverting dividends or other income to lower-income family members to reduce their overall family tax bill.

When TOSI applies, the income received by the family member (spouse, adult child under 25, or in some cases older family members) is taxed at the highest marginal rate regardless of that person's income level — eliminating the tax benefit of splitting. TOSI applies to dividends from a private corporation, income from a partnership, and certain other amounts.

There are exclusions. A spouse or adult family member who makes a meaningful contribution to the business — through labour, capital at risk, or prior business activity — may be excluded from TOSI on amounts reasonably attributable to their contribution. However, determining what constitutes a "reasonable return" for the individual's contribution involves complex analysis, and CRA scrutinizes these arrangements closely.

If CRA has reassessed you asserting TOSI applies to amounts paid to a family member, review whether any exclusion could apply based on that person's actual involvement in the business, and consult a tax lawyer to evaluate the strength of an objection.