- TOSI works as a default rule with listed exceptions, not the other way around.
- Excluded Business Income can fall outside TOSI where the family member receiving it is actively and substantially engaged in the business — genuinely working in it on a regular,…
The tax on split income rules — usually shortened to TOSI — were introduced to stop family businesses from routing income to lower-earning relatives purely to reduce the overall family tax bill. When TOSI applies, the income is taxed at the top personal rate in the recipient's hands, wiping out the benefit of splitting it in the first place. But TOSI was never meant to catch every payment to a family member, and the rules carve out several genuine exclusions.
This guide walks through the main categories of income that can still fall outside TOSI, so you can tell the difference between income splitting that remains legitimate and income splitting that isn't.
The Starting Point: TOSI Applies Unless an Exclusion Fits
TOSI works as a default rule with listed exceptions, not the other way around. If a family member receives dividends, certain other income, or specific capital gains connected to a related business, the starting assumption is that TOSI applies — unless the payment fits squarely within one of the recognized excluded categories. The burden is effectively on the family to show the exclusion applies, not on CRA to show it doesn't.
The Main Exclusion Categories
1. Excluded Business
Income can fall outside TOSI where the family member receiving it is actively and substantially engaged in the business — genuinely working in it on a regular, continuous basis, not just nominally listed as involved. This is a fact-based test focused on real contribution of labour to the business.
2. Excluded Shares
A family member who owns a meaningful, direct equity stake in a corporation — one that meets specific ownership and business-activity conditions set out in the rules — can receive dividends on those shares without TOSI applying, regardless of how actively involved they are in day-to-day operations. This exception has its own detailed test, covered separately below.
3. Reasonable Return
Even outside the excluded-business and excluded-shares categories, an amount can escape TOSI if it reflects a reasonable return given what the family member actually contributed — their labour, capital invested, financial risks assumed, and past compensation. CRA measures this against what an arm's-length person would have received for the same contribution.
4. The Age-65 Exemption
Once the business owner turns 65, a broader range of amounts paid to a spouse can become excluded — generally the same amounts that would have been excluded had the 65-year-old received them personally. This effectively extends favourable treatment to spousal income splitting later in life.
5. Capital Gains on Qualifying Property
Certain capital gains — for example, gains that would otherwise qualify for the lifetime capital gains exemption on qualifying small business shares — can fall outside TOSI's reach in specific circumstances, separate from the dividend-focused exclusions above.
6. Inherited Property and Other Specific Carve-Outs
Property received as an inheritance, and a handful of other narrowly defined situations, carry their own excluded treatment under the rules.
Comparing the Exclusions at a Glance
| Exclusion | What it's based on |
|---|---|
| Excluded business | Genuine, regular labour contribution to the business |
| Excluded shares | Meaningful direct ownership stake meeting specific conditions |
| Reasonable return | Fair value of labour, capital, and risk actually contributed |
| Age-65 exemption | Business owner reaching a specific age threshold |
| Qualifying capital gains | Type of property disposed of, separate from dividend income |
What Doesn't Work
- Adding a family member as a nominal director or officer with no real involvement, hoping this alone satisfies an exclusion.
- Paying a spouse or adult child a round-number dividend unconnected to any documented contribution or share ownership that meets the excluded-shares conditions.
- Assuming any payment to a family member under a certain size is automatically safe — there is no blanket small-amount exemption built into TOSI itself.
Frequently asked questions
Does TOSI apply to minor children the same way it applies to adult family members?
Payments to minor children face additional restrictions beyond the exclusions described here, and the "reasonable return" and "excluded shares" exceptions generally do not extend to income split with minors in the way they can for adults. Minor-child income splitting deserves its own separate review.
If my spouse works in the business part-time, is that enough for the excluded business exception?
It depends on whether the involvement is regular, continuous, and substantial rather than occasional or token. Part-time work can qualify, but the specifics of hours, role, and consistency matter, and this is worth confirming with a professional rather than assuming.
Can I rely on more than one exclusion for the same payment?
The exclusions are not mutually exclusive — a payment might potentially be defended under more than one category depending on the facts, though in practice it's usually clearest to identify the strongest applicable exclusion and document that one properly.
What happens if CRA decides none of the exclusions apply?
If no exclusion applies, the income is taxed at the top marginal rate in the recipient's hands regardless of their actual income level, which can significantly increase the family's overall tax bill compared to what was expected.
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