SME Accounting
TOSI in Quebec: A guide to income splitting within families (2026)
3/8/2026
You are incorporated, your spouse owns some shares, and you are considering paying them a dividend to reduce the family tax bill. Good news: it's still possible. Bad news: since 2018, the tax authorities Canada It applies very strict rules that can transform that same dividend into a 53% federal tax bill. This is the infamous TOSI income splitting rule , and it has profoundly changed the tax planning of Quebec entrepreneurs.
This guide demystifies the mechanics, details the five practicable exceptions and illustrates with concrete cases when splitting remains a legitimate strategy in Quebec in 2026.
The SOI is a federal rule that taxes certain income paid by a private corporation to a family member of the business owner at the highest marginal tax rate . Specifically, when a Canadian-controlled private corporation (CCPC) pays a dividend or interest to your spouse, adult child, or father without them having actually contributed to the business, this income is taxed as if it came from the highest-income recipient, regardless of their actual income.
The goal is to prevent incorporated entrepreneurs from artificially splitting their income to take advantage of the lower tax rates of other family members. Without TOSI, a majority shareholder could divide $200,000 in dividends into four installments for their spouse and adult children in college, saving tens of thousands of dollars in taxes. Section 120.4 of the Income Tax Act closes this loophole, except in certain circumstances.
Before 2018, the TOSI only targeted income paid to minors (the split income tax for minors, or kiddie tax). The federal reform of December 13, 2017, which came into effect on January 1, 2018, extended the net to adult family members : spouse, common-law partner, adult children, parents, grandparents, brothers and sisters.
The Finance Minister justified this reform by citing the aggressive tax planning practices of certain family trust structures. According to data published by HM Revenue & Customs , tens of thousands of private companies have had to revise their compensation strategies. In Quebec, the Ordre des CPA du Québec estimated that the majority of firms had to restructure the portfolios of more than half of their family-incorporated clients.
The concrete result: many Quebec entrepreneurs have since believed that income splitting is dead . This is not true. It is regulated, documented, and reserved for situations that fall outside the established exceptions, but it remains a legitimate strategy when the conditions are right.
The TOSI targets so-called split income that a private company or related entity pays to a family member. More specifically:
Investment income from the public market (dividends from listed companies such as RBC or Hydro-Québec) is not affected. Salary paid regularly to a family member is also not subject to the TOSI (Tax on Income from Social Security Contributions): it falls under the reasonableness test for salary provided for in section 18 of the Income Tax Act. This point is crucial in choosing between salary and dividends .
When the tax-free allowance for split income (TFSA) is triggered, the split income is taxed at the highest federal marginal rate (33%) plus the highest Quebec provincial marginal rate (25.75%). For an ineligible dividend paid in 2026, this translates to approximately 48.7% combined tax after dividend credits (~46% after increases, depending on the year). For interest income, the rate rises to 53.31% . No personal credits or basic deductions are available against this income, meaning that even a student with no other income pays the full rate.
See also the term salary-dividend strategy in our glossary to understand the impact on the compensation mix.
The CRA broadly defines the concept of a person related by blood, marriage, or adoption in section 251 of the Income Tax Act. For the purposes of the TOSI, the following definitions apply:
This is where all the planning comes in. The TOSI (Tax on Income Tax) provides for five main exceptions that allow dividends to be paid at the beneficiary's normal tax rate. Understanding these exceptions is essential before declaring a family dividend.
If you are 65 or older during the tax year, dividends paid to your spouse are exempt from the Swiss Federal Tax on Income (STI). This exception is consistent with pension income splitting rules. This is one of the few strategies available to entrepreneurs transitioning to retirement that allows them to further optimize family income through a Canadian-controlled private corporation (CCPC).
A family member aged 25 or over who holds at least 10% of the company's shares in voting rights and value may receive dividends at the normal rate, provided that:
Specifically, operating companies that sell goods (retail, manufacturing, distribution) are eligible. Professional services firms or management companies that receive their income from another operating company are not. This exception cannot be combined with a trust: the shares must be held directly.
A family member who makes a regular, continuous, and substantial contribution to the business is also exempt from the TOSI. The IRS Technical FAQ on Split Income Tax specifies a benchmark threshold: 20 hours per week on average during the tax year (or during one of the five preceding years, as a safety margin).
The trap: this 20-hour threshold is merely a safe haven . Even below that, the contribution may be deemed sufficient if it is documented (timesheets, emails, signed contracts, employee management, etc.). This is the most common mistake in tax audits: paying a dividend to the spouse without any paperwork to document their contribution.
Capital gains realized on the sale of eligible small business corporation shares (ESBs) can benefit from the cumulative capital gains exemption, even if they arise from a family transaction. In 2026, the cap on the cumulative capital gains exemption is increased to approximately $1.25 million per taxpayer (after indexing since the 2024 federal budget). This is a powerful exception for estate planning and family trusts , allowing the cumulative capital gains exemption to be shared among beneficiaries.
Even without checking one of the exceptions above, a family member aged 25 or older can receive split income without TOSI if that income is reasonable considering:
For beneficiaries aged 18 to 24, this test is stricter: only a reasonable return on invested capital is acceptable. This is the most subjective aspect of the TOSI (Tax on Social Security Contributions), and that's why documentation becomes crucial in the event of an audit.
| Exception | Age requirement | Key condition | Documentation |
|---|---|---|---|
| Spouse 65+ | Owner 65+ | Aligns with pension splitting | Date of birth is sufficient |
| Excluded actions | 25+ | 10% vote and value, non-professional company | Share register, financial statements |
| Active contribution | 18+ | 20 hours/week or proven contribution | Timesheets, emails, mandates |
| EGCG | None | Provision of AAPE shares | Balance sheet, financial statements, certifications |
| Character test; | 25+ (flexible) / 18-24 (capital only) | Salary, capital, and risks justify the income | Capital investment, bank guarantees, contracts |
Marie owns a clothing boutique in Sherbrooke, which is incorporated. Her husband, Jean, works regularly at the boutique: an average of 35 hours per week, for the past three years. He handles merchandising, digital marketing, and supplier relations. Mary will pay John $50,000 in dividends in 2026.
Analysis: The exception for active and regular contribution is met. The 20-hour threshold is significantly exceeded. The dividend is taxed at Jean's personal marginal rate (~28% after dividend credit), not at 47%. Savings: approximately $9,000.
Security requirements: Jean must have a signed timesheet, a monthly scheduling email, and of course a formal title (e.g., Marketing Director). In the event of an ARC audit, these documents make all the difference.
Patrick owns an IT consulting firm in Laval. His husband, Karim, does not work in the business and has a day job as a firefighter. Patrick owns 75% of the company's capital and Karim 25%. Patrick pays Karim an unspecified dividend of $30,000.
Analysis: No exceptions apply. Karim is neither 65 years old, nor actively involved in the business, nor does he meet the thresholds for excluded shares (service firm). The TOSI applies: $30,000 taxed at approximately 46%, resulting in $13,800 in tax instead of $8,400 at normal rates. Additional cost: $5,400.
Solution: either maintain a dividend paid solely to Patrick and reinvest the remainder, or create a genuine role for Karim with documented hours. The first option is often the safest for this structure.
Diane and Robert own a manufacturing company in Trois-Rivières. Their daughter Sara, 28, has held 12% of the common shares since an estate freeze in 2023. Sara works seasonally at the factory during the summer (15 hours/week, 3 months a year).
Analyse : l'entreprise est manufacturière (donc non professionnelle, < 90 % de revenus de services), Sara a 25+ et détient 10 %+ des actions. Exception actions exclues respectée. Le dividende versé à Sara est taxé à son taux marginal personnel même sans contribution active prouvée.
If the company were a consulting firm, the exception would not hold and Sara would have to pass the active contribution test.
The refundable dividend tax on hand ( RDTOH ) interacts directly with the tax on self-employment income (TSI). If your corporation accumulates investment income, paying dividends to recover the RDTOH to a family member subject to TSI is significantly more expensive. See our upcoming article on RDTOH and passive income (to be published Q3 2026) for the full explanation.
Income splitting remains one of the most profitable tax strategies in Quebec, but it requires specialized expertise. A corporate tax accountant plays several essential roles:
The stakes go far beyond simply ticking boxes. It's about building a strategy that aligns with your long-term vision: family succession, retirement, or selling the business. To delve deeper into this overall approach, consult our ultimate guide to tax optimization for entrepreneurs or our dossier on tax planning in Quebec .
Bankeo connects you with chartered accountants specializing in corporate taxation in Quebec. Access to a network of 1,500+ accountants, 15,000+ requests from entrepreneurs received since 2023.
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No. Wages paid via payslip are not subject to the TOSI (Tax on Income from Social Security Contributions). They are instead governed by the reasonable salary test of section 18 of the Income Tax Act: an accountant may determine that a salary that is excessive given the role is not deductible for the company. The criterion is different and generally more flexible than the TOSI on dividends.
Yes, since 2018. Historical share ownership no longer creates an exception in itself. You must meet one of five exceptions: excluded shares (if the company is not a service company), the reasonableness test, or wait until you are 65. A quick consultation with a tax advisor is recommended before the next dividend payment.
The safe harbor threshold is 20 hours per week on average during the fiscal year, or during one of the five preceding years. Below this threshold, the contribution must be demonstrated by other means: strategic importance, rare expertise, employee management, etc.
No, on the contrary. Trust distributions are specifically addressed by the TOSI. A trust can even block access to the excluded shares exception, which requires direct ownership by the individual. Before using a trust, ensure its rationale extends beyond asset splitting (for example, EGCG multiplication or estate planning flexibility).
Yes. The tax on self-employment benefits (TOSI) does not depend on whether you also pay yourself a dividend. The determining factor is the beneficiary's status (inactive adult child) and the nature of the income (dividend from a private corporation). Even if the dividend is paid exclusively to the child, the TOSI applies.
Yes. Since 2018, audits targeting split income have increased significantly, particularly in professional and management companies. The IRS's tax compliance strategy explicitly mentions TOSI in its annual priorities.
Draft an internal policy detailing their role, weekly schedules, work emails, mandates signed on their behalf, managed suppliers, and supervised employees. Retain these documents for at least six years, as required by tax statute of limitations.
The TOSI (Tax on the Organization of the Self-Employed) has transformed family tax planning in Quebec since 2018, but it hasn't killed it. The five exceptions—65+, excluded shares, active contribution, EGCG (Economic Group of Companies), and the reasonableness test—leave real room for incorporated entrepreneurs who structure their business and rigorously document their distributions. Paying an undocumented dividend to a non-contributing spouse remains a key mistake that costs an average of $5,000 to $15,000 per year in additional taxes.
Before your next family dividend, confirm your eligibility for exceptions, structure your documentation, and align your compensation strategy with your long-term goals. A specialized accountant can identify these blind spots in a matter of hours and save you from costly adjustments costing tens of thousands of dollars.
General information provided for guidance purposes only, reflecting current 2026 tax rules. It does not replace the advice of a CPA: always consult a professional for your specific situation.
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