Tax on Split Income (TOSI) 2025: When the Top Rate Wipes Out Family Income Sprinkling

For 30 years, Canadian small-business owners used the same playbook: pay yourself a modest salary, pay your spouse and adult children dividends from the family CCPC, and let the household tax bill fall by tens of thousands of dollars a year by spreading income across multiple low-bracket taxpayers.

The 2018 federal reform — formally the Tax on Split Income (TOSI) — closed most of that door. Today, if a “specified individual” (broadly: a Canadian-resident family member of the business owner) receives a dividend, management fee, or interest payment from a private corporation, the entire amount is taxed at the top federal-plus-provincial marginal rate (roughly 47% to 54% depending on the province) unless the payment qualifies for a narrow list of statutory exclusions.

This article walks through how TOSI works in 2025, the three big “excluded amount” tests that still let income sprinkling work, the 18–24 age trap, two worked examples, and what’s still safe under the current rules.

What TOSI is

TOSI was introduced in the 2018 federal budget as a response to the so-called “private corporation tax planning” controversy. Before 2018, an Ontario business owner in the top bracket could pay a non-working spouse a $50,000 eligible dividend at roughly 8% effective rate (≈ $4,000 tax) instead of taking the same money out personally at 53% marginal rate ($26,500). The “kiddie tax” already restricted this for minors, but adult family members were fair game.

Since January 1, 2018, section 120.4 of the Income Tax Act has been amended to apply the highest federal marginal rate (33%) plus the highest provincial marginal rate to “split income” received by any specified individual — unless an “excluded amount” exemption applies. Together, the federal-plus-provincial top rate ranges from:

• Nunavut: ~44.5%
• British Columbia: ~53.5%
• Ontario: ~53.5%
• Quebec: ~53.3%
• Newfoundland and Labrador: ~54.8%

Critically, this rate applies to the first dollar — there are no graduated brackets, no basic personal amount, no spousal credit, no tuition credit, no medical credit available to shelter the split income.

Who’s caught: “specified individuals”

A “specified individual” under section 120.4(1) is a Canadian-resident individual (excluding the business owner themselves) related to the source individual who owns or controls the underlying business. In practice, the people most often caught are:

• The business owner’s spouse or common-law partner.
• The business owner’s adult children (18+).
• The business owner’s parents, grandparents, siblings, and the spouses of those individuals.
• The business owner’s minor children — already caught by the older “kiddie tax” rules, now subject to TOSI as well.

A “related business” is any business in which a related person is actively engaged, or in which a related person owns ≥10% of the shares (votes or value). So if your spouse owns one share of your CCPC, any dividend on that share is split income — full stop — unless an exclusion applies.

“Split income” itself includes: dividends from private (non-publicly-traded) Canadian corporations, partnership and trust allocations attributable to a related business, interest from a private corp, capital gains on transfers from related parties, and certain capital gains on QSBC shares received from related parties.

The three big “excluded amount” tests

The 2018 rules then carve out three major exclusions that let income sprinkling continue only in specific fact patterns. If the payment qualifies for any one of these, TOSI does not apply and the recipient pays normal graduated rates on the dividend.

1. Excluded business test

The recipient must be actively engaged on a regular, continuous, and substantial basis in the related business — either during the current tax year or for any five prior tax years (not necessarily consecutive).

CRA’s interpretation: an average of at least 20 hours per week during the portion of the year the business operates creates a safe-harbour presumption. Fewer than 20 hours can still qualify on a facts-and-circumstances test, but CRA scrutinizes it heavily and the burden is on the taxpayer.

If the recipient meets the test in any current year, all split income from the business that year is exempt — dividends, salaries, interest, the lot. The 5-year lookback means a spouse who worked 25 hours/week from 2018–2022 can still take TOSI-free dividends in 2025 even after stepping back, provided records of the historic engagement exist.

2. Excluded shares test

This is the cleanest carve-out but the eligibility cliff is sharp. The recipient must:

• Be age 25 or older (NOT available to 18–24 year olds).
• Own at least 10% of the votes AND 10% of the value of all classes of the corporation’s shares.
• The corporation must earn less than 90% of its income from the provision of services.
• The corporation must not be a “professional corporation” — doctors, dentists, lawyers, accountants, chiropractors, and veterinarians’ professional corporations are explicitly excluded.

The 90%-services bar disqualifies most consulting practices. A real estate brokerage owned by a couple, a software-product company, a retail store, a manufacturing business — these typically qualify. A solo IT-consulting CCPC where 100% of revenue is the owner’s billable hours typically does not.

3. Reasonable return test

Available only to those 25 or older. The split income is treated as reasonable based on:

• Labour contribution of the recipient.
• Capital contribution (assets, cash put into the business).
• Risk assumed (guarantees, loan co-signing).
• Previous amounts paid for similar functions.

This is the most subjective test. CRA Folio S1-F5-C2 gives examples but the safe path is documentary evidence — employment agreements, capital contribution records, personal guarantee documents. A $30,000 dividend to a spouse who guaranteed a $200,000 line of credit, contributed $50,000 of seed capital, and provides 5 hours/week of bookkeeping might pass; the same dividend to a spouse with no documented involvement almost certainly will not.

The age 18-24 trap

For adult children aged 18 to 24, only two carve-outs survive:

1. Labour contribution carve-out — the recipient must be actively engaged in the business at the 20-hours/week standard. The 5-year lookback does not apply to this age group; they must meet the test in the current year.
2. Safe harbour capital return — a cap equal to the prescribed rate (Q2 2026: 6%) multiplied by arm’s-length capital contributions the child made to the business from their own funds (not gifted by parents).

In practice, the safe harbour capital return path is rarely material. A 22-year-old who genuinely contributed $20,000 of their own savings to a parent’s CCPC could receive ~$1,200/year of TOSI-free dividends. That’s it.

The reasonable return test is unavailable to 18–24 year olds — full stop. If a 22-year-old child receives a $20,000 dividend without working the 20 hours, the entire $20,000 is taxed at the top marginal rate, even if a 26-year-old in identical circumstances could have argued reasonable return.

Worked example A — sprinkling survives

The Patel family runs a retail business through a CCPC in Ontario. The husband is the founder; his wife, Anjali (age 38), runs the storefront 22 hours/week year-round managing inventory, scheduling staff, and handling customer service. The CCPC’s revenue is 100% from product sales (not services).

Anjali holds 30% of the CCPC’s shares (votes and value) and receives a $30,000 ineligible dividend in 2025.

Does TOSI apply? Test the three exclusions:

• Excluded business: Anjali averages 22 hours/week — passes the 20-hour safe harbour. ✅
• Excluded shares: Anjali is 38 (over 25), owns >10% of votes and value, CCPC is not a service business (it’s retail), not a professional corp. ✅
• Reasonable return: Easily defensible given her active role. ✅

TOSI does NOT apply. The $30,000 is taxed under normal Ontario graduated rates for ineligible dividends. After the gross-up (15% for ineligible dividends in 2025) and the dividend tax credit (~9.03% federal + ~2.99% Ontario for 2025), Anjali’s effective tax rate on $30,000 of ineligible dividend (assuming this is her only income) is roughly 0% — fully sheltered by the basic personal amount and dividend tax credit.

Net tax on the $30,000 dividend: ~$0.

If the husband had taken the same $30,000 personally on top of his existing ~$200,000 of business income, his marginal rate on it would be ~47.97% (Ontario top combined rate at ~$250k income, ineligible dividend rate). Net tax: ~$14,400.

Household savings from sprinkling to Anjali: ~$14,400.

Worked example B — sprinkling clawed back to zero

Identical setup, except Anjali does not work in the business. She holds her 30% share from a 2015 freeze-and-reorganization done before the TOSI rules. She does no bookkeeping, customer service, or operations.

Does TOSI apply? Test the three exclusions:

• Excluded business: Fails — no labour engagement. ❌
• Excluded shares: Anjali is 38, owns >10% votes and value, CCPC is not service-based or a professional corp. ✅

The excluded shares test alone is enough — Anjali still qualifies because the CCPC earns >90% from products, not services.

TOSI does NOT apply (thanks to excluded shares) — she pays normal graduated rates and the household still saves ~$14,400.

Now change one fact — make this an IT consulting CCPC where the husband bills $250,000/year of his own consulting time and the company has no product revenue:

• Excluded business: Fails. ❌
• Excluded shares: Fails — services >90% of revenue. ❌
• Reasonable return: Indefensible without labour or capital contribution. ❌

TOSI applies. $30,000 × 53.53% = $16,059 in tax.

Compare to the husband taking the same $30,000 personally on top of his $250k consulting income — his marginal Ontario ineligible-dividend rate is ~47.97%, so $14,391 in tax.

Sprinkling to non-working Anjali in the service corp costs $1,668 MORE than not sprinkling at all. The entire benefit is clawed back, plus a penalty.

What’s still safe in 2025

The 2018 rules did not kill family-business income spreading entirely. Several strategies are explicitly preserved:

• Salary for actual work performed. Salaries are deductible to the corporation, taxed at the recipient’s graduated rate, and not subject to TOSI at all (TOSI only covers dividends, partnership/trust allocations, and certain interest). If your spouse genuinely works 10 hours/week, paying a documented $25,000 salary is still fully effective. The CRA can challenge “reasonableness” — paying $80,000 for work worth $15,000 will be reassessed — but a reasonable salary survives.
• Capital gains on shares held for more than two years, where the recipient is 18 or older and the shares were not received from a related party in a non-arm’s-length transfer within the past two years. Inheritances and arm’s-length purchases are not split income.
• Excluded business CCPCs with actively engaged family members (see Test 1).
• Excluded shares non-service CCPCs with 25+ family member shareholders holding ≥10% (see Test 2).
• Spousal RRSP contributions — a parallel income-splitting strategy entirely outside TOSI. The contributor takes the deduction; the spouse pays tax on withdrawals (after the 3-year attribution period) at their lower rate.
• Pension income splitting — at age 65+, qualifying RRIF and pension income can be split 50/50 with a spouse via the T1032 election. Outside TOSI scope.

What’s still caught: minors and the original kiddie tax

The original “kiddie tax” rules (section 120.4 before the 2018 amendments) still apply to minors (under 18 at year-end) and were not repealed. Any split income to a minor — dividends from a private corp, certain partnership allocations — is taxed at the top federal rate, with no excluded business, excluded shares, or reasonable return carve-out available. The 2018 TOSI amendments layered an additional restriction on minors but the older rule still does most of the work for that age bracket.

This means sprinkling to children under 18 has been a non-starter since the original 1999 kiddie tax. The 2018 TOSI extended that treatment to adult family members.

Decision framework

For a typical CCPC owner considering a 2025 sprinkling strategy:

1. Is the family member actively engaged ≥20 hrs/week? Yes → excluded business, sprinkling works, normal tax rates apply.
2. Is the family member 25+, owns ≥10%, CCPC is non-services and not professional? Yes → excluded shares, sprinkling works.
3. Is there a defensible reasonable-return argument (25+ only)? Maybe — document labour, capital, risk. CRA-challengeable.
4. None of the above? TOSI applies. Sprinkling will cost MORE than not sprinkling. Pay the dividend to yourself, or use spousal RRSP / pension splitting / salary-for-work-done instead.

Run the numbers in our dividend tax calculator to see the difference between eligible-dividend, ineligible-dividend, and top-rate TOSI treatment in your province.

Related reading

• Salary vs dividends for CCPC owners — when to take the corporate income out as wages instead of dividends.
• Should you incorporate your business? — the threshold income where a CCPC starts paying off.
• Should you contribute to a spousal RRSP? — income splitting that lives entirely outside TOSI.

FAQ

Q: My spouse owns 50% of our CCPC from a 2010 freeze. Does TOSI apply to dividends paid to them today?

A: It depends on whether any exclusion is met. If the CCPC is a product/non-service business and your spouse is 25+, the excluded shares test likely exempts the dividends regardless of involvement. If it’s a services or professional corporation, only the excluded business test (20 hrs/week active engagement) or a defensible reasonable return saves you. Pre-2018 share structures don’t grandfather anyone — TOSI applies prospectively to every dividend paid from January 1, 2018 onward.

Q: Can I pay my 19-year-old child a $5,000 dividend if they help out occasionally at the family store?

A: Almost certainly TOSI-caught. The 18–24 age band has no excluded shares test and no reasonable return test. The only escape is 20 hours/week active engagement in the current year (no 5-year lookback for under-25s) or a tiny safe-harbour capital return on the child’s own arm’s-length contributions. “Helps out occasionally” doesn’t meet the 20-hour bar. The $5,000 will be taxed at the top combined rate — roughly $2,600 of tax in Ontario versus ~$0 at the child’s basic personal amount if the same money had been a documented salary for actual work.

Q: How does CRA find out if my spouse isn’t actually working the 20 hours?

A: CRA reviews are typically triggered by patterns — large dividends to non-working spouses paired with no T4 income, no CPP contributions, or no record of the spouse on the corporate organizational chart. The CRA can request time records, work logs, customer-facing communications, and minutes of director meetings. The burden is on the taxpayer to substantiate the exclusion. Contemporaneous records (calendars, timesheets, email logs) beat reconstructed declarations.