Paying Family Members from Your Corporation in Ontario: TOSI Rules and What's Still Allowed

Incorporating your business and then paying dividends to a spouse, adult child, or parent who is also a shareholder used to be a popular income-splitting strategy. By spreading corporate income across family members in lower tax brackets, a business owner could significantly reduce the family's total tax bill. The CRA noticed, and in 2018 the government dramatically expanded the Tax on Split Income (TOSI) rules.

TOSI is now one of the most complex areas of small-business tax in Canada. If it applies, the family member receiving the income pays tax at the highest marginal personal rate — regardless of their own income level. The benefit of income splitting disappears entirely. But TOSI is not a blanket prohibition; there are meaningful exceptions, and genuine family employment arrangements still work. This article explains the framework for Ontario families who operate through a corporation.

What Is TOSI?

TOSI is a federal tax that applies the top personal marginal rate to certain types of split income received by a person from a related business where the income is considered to have been inappropriately diverted. It applies to:

• Dividends (or shareholder loan benefits) received from a private corporation from which a related individual earned income
• Certain capital gains on the disposition of shares of a private corporation
• Income from a partnership or trust that has a direct or indirect connection to a related business

TOSI applies to specified individuals — broadly, Canadian residents who receive income from a related business in which another family member (the "source individual") is actively engaged. The rules are fact-specific; the following is a general overview.

Who Is Caught: The Related Persons Definition

TOSI can potentially apply when income is paid to:

• A spouse or common-law partner
• A child, grandchild, or other descendant
• A parent or sibling

The key is whether the income flows from a corporation that the source individual (you, the owner-manager) is "connected" to. For most Ontario small businesses with a single owner-operator, practically every family member who receives corporate income could theoretically be subject to TOSI — unless an exception applies.

The Key Exceptions (Excluded Amounts)

This is where planning lives. TOSI does not apply to excluded amounts, which include:

Reasonable Salary for Genuine Work

If the family member provides services to the business and the amount paid to them is reasonable given what the corporation would pay an arm's-length person to do that work, salary or wages paid are generally not subject to TOSI. An adult child who genuinely works full-time in the business and earns a market salary for that work is fine.

The CRA looks hard at whether the employment is real, the hours are genuine, and the rate of pay is comparable to what you would pay an unrelated employee for the same role. Paying your teenager $80,000 a year to answer phones one afternoon a week will not survive scrutiny.

Excluded Shares: Significant Ownership

Dividends on excluded shares are not subject to TOSI. Shares qualify as excluded if the recipient (not the source individual) owns at least a defined percentage of the votes and value of the corporation, the corporation is not a professional corporation, and the recipient is 25 years of age or older and is not related to a person who controls the corporation through ownership.

As of writing, the ownership threshold is set in the Income Tax Act; confirm the current percentage with your accountant. For many family businesses where the spouse owns a meaningful equity stake and meets the age requirement, this exception can shelter dividends.

Age 25 or Older and Reasonable Return

For family members who are 25 years old or older and who own shares, dividends may be excluded if they represent a reasonable return on the capital contributed or risk accepted by the family member. This is a qualitative test — the CRA will ask whether the family member put in money, took on risk, or provided other value that justifies the dividend.

Under Age 18: Virtually Always Caught

For children under 18, TOSI applies broadly to dividends, partnership income, and certain trust income from family businesses. There is essentially no exception for minors receiving dividends from a parent's corporation. If your plan involves paying dividends to a minor child, do not — TOSI will apply at the top rate.

Structuring the Corporation to Allow Family Participation

If you want to legitimately involve a spouse or adult children in your corporation for income-splitting purposes, structure matters enormously. Options to discuss with your lawyer and accountant include:

• Multiple share classes: different classes with different dividend rights allow flexibility, but TOSI still applies unless an exception is met. The structure does not create the exception by itself.
• Equity investment by the family member: if a spouse or adult child genuinely invests their own capital into the business and receives shares proportionate to that investment, the excluded shares or reasonable return exceptions may apply.
• Genuine employment: document job descriptions, hours, and pay rates comparable to what you would pay an unrelated hire.

The Excluded Business Exception

If a family member is actively engaged in the business — meaning they work on a regular, continuous, and substantial basis during the year or any five prior years — dividends received on shares may be excluded from TOSI. "Regular, continuous, and substantial" generally means something close to full-time involvement. Occasional participation does not qualify.

Frequently asked questions