SME Accounting
TOSI in Quebec: A guide to family income splitting (2026)
3/8/2026
You’re a corporation, your spouse owns a few shares, and you’re thinking about paying them a dividend to reduce your family’s tax bill. Good news: it’s still possible. Bad news: since 2018, the Canada Revenue Agency has been enforcing very strict rules that can turn that same dividend into a 53% federal-provincial tax bill. This is the infamous TOSI Income Splitting, and it has profoundly changed tax planning for Quebec entrepreneurs.
This guide demystifies the mechanics, details the five practical exceptions, and uses real-life examples to illustrate when income splitting remains a legitimate strategy in Quebec in 2026.
TOSI is a federal rule that requires highest marginal tax rate certain types of income that a private corporation pays to a family member of the business owner. Specifically, when a CCPC pays a dividend or interest to your spouse, adult child, or father without them having actually contributed to the business, that income is taxed as if it came from the recipient with the highest tax rate, regardless of their actual income.
The goal: to prevent incorporated business owners from artificially splitting their income to take advantage of lower tax brackets for other family members. Without the TOSI, a majority shareholder could split $200,000 in dividends into four payments to their spouse and adult children who were still in school, saving tens of thousands of dollars in taxes. The Income Tax Act, Section 120.4 closes this door, with some exceptions.
Before 2018, TOSI applied only to income paid to minors (the tax on minors’ split income, or “kiddie tax”). The federal reform of December 13, 2017, which took effect on January 1er In January 2018, the program was expanded to include adult family members : spouse, common-law partner, adult children, parents, grandparents, brothers and sisters.
The Minister of Finance justified this reform by citing what he deemed to be aggressive tax planning by certain family trust structures. According to the Data published by the CRA, 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 corporate clients with families.
The bottom line: Many Quebec entrepreneurs have long believed that income splitting is death. That’s not true. It is regulated, documented, and reserved for situations that meet the exceptions, but it remains a legitimate strategy when the conditions are met.
TOSI targets so-called split (split income) that a private corporation or related entity pays to a family member. More specifically:
Investment income from the public market (dividends from publicly traded companies such as RBC or Hydro-Québec) is not subject to TOSI. Salary paid via regular paychecks to a family member is also not subject to TOSI; rather, it is subject to the reasonableness of the income provided for in Section 18 of the Income Tax Act. This point is fundamental in choosing between Salary and Dividends.
When TOSI is triggered, the split income is taxed at the highest federal marginal tax rate (33%), plus the Quebec’s highest provincial marginal tax rate (25.75%). For an undetermined dividend paid in 2026, we’re talking about approximately 48.7% combined tax rate after dividend credits (~46% after adjustments depending on the year). For interest income, the rate rises to 53.31%. No personal credit or basic deduction is allowed against this income, which means that even a student with no other income pays the full tax rate.
See also See “salary-dividend strategy” in our glossary to understand the impact on your compensation mix.
The CRA broadly defines the concept of a person related by blood, marriage, or adoption under Section 251 of the Income Tax Act. For TOSI purposes, the following applies:
This is where all the planning comes into play. The TOSI provides for five major exceptions that allow dividends to be paid at the recipient’s regular tax rate. It is crucial to understand these exceptions before declaring a family dividend.
If you are 65 or older during the tax year, the dividends you pay to your spouse are exempt from the TOSI. This exemption aligns with the rules for splitting pension income. It is one of the few strategies available to entrepreneurs transitioning to retirement that allows them to further optimize family income through a CCPC.
A family member aged Age 25 or older who holds at least 10% of the shares A shareholder holding a certain percentage of the company’s voting shares and equity may receive dividends at the standard rate, provided that:
Specifically, operating companies that sell goods (retail, manufacturing, distribution) are eligible. Professional service firms or management companies that receive their income from another operating company are not eligible. This exception also cannot be combined with a trust: the shares must be held directly.
A family member who makes a regular, ongoing, and substantial contribution to the business is also exempt from the TOSI. The CRA Technical FAQ on Split Income Tax specifies a reference threshold: 20 hours per week on average during the tax year (or during any of the five preceding years, as a safety net).
The catch: this 20-hour threshold is just a safe harbor. Even if the contribution is below that threshold, it may still be deemed sufficient if it is properly documented (attendance records, emails, signed contracts, employee management records, etc.). This is the most common mistake in tax audits: paying a dividend to a spouse without any written record of their contribution.
The capital gain realized upon the disposition of Eligible Small Business Shares (ESBS) may be eligible for the lifetime capital gains exemption, even if the gain results from a family transaction. In 2026, the CCA limit will be increased to approximately $1.25 million per taxpayer (after indexation since the 2024 federal budget). This is a powerful exception for estate planning and family trust, which allows the EGCG to be split among beneficiaries.
Even if none of the above exceptions apply, a family member who is Age 25 or older may receive split income without TOSI if that income is reasonable Taking into account:
For beneficiaries aged 18 to 24, this test is stricter: only a reasonable return on the invested capital is eligible. This is the most subjective aspect of the TOSI, which is why documentation becomes a crucial asset in the event of an audit.
| Exception | Age Requirement | Key Condition | Documentation |
|---|---|---|---|
| Spouse Age 65 or Older | Homeowners Aged 65 and Older | Aligns with pension splitting | Just your date of birth is needed |
| Excluded Stocks | 25+ | 10% of votes and value, non-professional company | Share Register, Financial Statements |
| Active Contribution | 18+ | 20 hours per week or proven contribution | Time sheets, emails, money orders |
| EGCG | None | Disposition of AAPE Shares | Balance Sheet, Financial Statements, Certifications |
| Reasonableness Test | 25+ (flexible) / 18-24 (principal only) | Salary, Capital, and Risks Determine Income | Down payments, bank guarantees, contracts |
Marie owns an incorporated clothing store in Sherbrooke. Her spouse, Jean, has been working regularly at the store, an average of 35 hours per week, for the past three years. He handles sales, digital marketing, and supplier relations. Marie pays Jean $50,000 in dividends in 2026.
Analysis: exception active and regular contribution Compliant. The 20-hour threshold is well exceeded. The dividend is taxed at Jean’s personal marginal rate (~28% after the dividend credit), not at 47%. Savings: approximately $9,000.
Security Terms: Jean must have a signed timesheet, a monthly schedule sent by email, and ideally a formal job title (e.g., marketing director). In the event of a CRA audit, these documents make all the difference.
Patrick owns an IT consulting firm in Laval. His spouse, Karim, does not work for the business and has a job elsewhere as a firefighter. Patrick owns 75% of the shares, and Karim owns 25%. Patrick pays Karim an undetermined dividend of $30,000.
Analysis: No exceptions apply. Karim is not 65 years old, does not have active participation, and does not meet the thresholds for excluded shares (service firm). TOSI applies: $30,000 taxed at ~46%, resulting in $13,800 in taxes rather than $8,400 at standard rates. Additional cost: $5,400.
Solution: either keep the dividend paid solely to Patrick and reinvest the remainder, or create a formal role for Karim with documented hours. The first option is often the safest for this structure.
Diane and Robert own a manufacturing business in Trois-Rivières. Their daughter Sara, 28, has held 12% of the common stock since an estate freeze in 2023. Sara works seasonally at the factory during the summer (15 hours per week, 3 months per year).
Analysis: The business is a manufacturing business (i.e., not a service-based business, with less than 90% of revenue from services), Sara is 25 or older, and owns 10% or more of the shares. Exception excluding stocks complied with. The dividend paid to Sara is taxed at her personal marginal tax rate even without proof of an active contribution.
If the business were a consulting firm, the exception would not apply, and Sara would have to meet the active participation test.
L'RDTOH (refundable tax held in trust for dividends) interacts directly with the TOSI. If your corporation accumulates investment income, the dividend paid to a family member subject to the TOSI to recover the RDTOH will cost you significantly more. See our next article on RDTOH and Passive Income (article to be published in Q3 2026) for a complete breakdown.
Income splitting remains one of the most profitable tax strategies in Quebec, but it requires specialized expertise. An accountant specializing in corporate taxation plays several essential roles:
The issue goes far beyond simply checking boxes. It’s about developing a strategy that aligns with your long-term vision: passing the business down to the next generation, retirement, or selling the business. To explore this broader approach, check out our The Ultimate Guide to Tax Optimization for Entrepreneurs or our feature on Tax Planning in Quebec.
Bankeo connects you with accountants specializing in corporate tax in Quebec. Access to a network of over 1,500 accountants; over 15,000 requests from business owners received since 2023.
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Avoiding a TOSI adjustment requires thorough documentation and advice from an accountant. The Bankeo Fee Barometer charges fees of around $3,000 per year (median; ranging from $500 to $6,000 depending on complexity), which are often well below the amount of tax saved, and the Bankeo Trust Index helps you choose a verified professional.
No. Salaries paid via payroll are not subject to the TOSI. Instead, they are governed by the reasonable salary test under Section 18 of the Income Tax Act: an accountant may determine that a salary is excessive given the role and therefore non-deductible for the corporation. This criterion is different from, and generally more flexible than, the TOSI rules on dividends.
Yes, since 2018. The historical ownership of shares no longer constitutes an exception in and of itself. You must meet one of the five exceptions: excluded shares (if the company is not a service corporation), the reasonableness test, or wait until you turn 65. A quick consultation with a tax advisor is recommended before the next dividend payment.
The safe harbor threshold is An average of 20 hours per week during the tax year or during one of the five preceding years. Otherwise, the contribution must be demonstrated by other means: strategic importance, rare expertise, management of employees, etc.
No, on the contrary. Trust distributions are expressly covered by the TOSI. A trust can even block access to the exception excluding stocks, which requires direct ownership by the individual. Before using a trust, make sure its purpose goes beyond mere income splitting (for example, increasing the total amount of the EGCG or providing estate planning flexibility).
Yes. TOSI does not depend on whether you also pay yourself a dividend. The criteria are the beneficiary’s status (adult, non-working child) and the nature of the income (dividend from a CCPC). Even if the dividend is paid exclusively to the child, TOSI still applies.
Yes. Since 2018, targeted audits of income splitting have increased significantly, especially among professional partnerships and management companies. The CRA tax compliance strategy explicitly mentions TOSI in its annual priorities.
Draft an internal policy detailing the individual’s role, weekly schedules, work-related emails, mandates signed on their behalf, suppliers managed, and employees supervised. Retain these documents for at least six years, as required by the tax statute of limitations.
TOSI has transformed family tax planning in Quebec since 2018, but it hasn’t put an end to it. The five exceptions, 65+, excluded shares, active contribution, EGCG, and the reasonableness test, provide real flexibility for incorporated entrepreneurs who structure their companies and rigorously document their payments. Paying an undocumented dividend to a spouse who does not contribute remains a key mistake that costs an average of $5,000 to $15,000 per year in additional taxes.
Before your next family dividend, verify your eligibility for exemptions, organize your documentation, and align your compensation strategy with your long-term goals. A specialized accountant can identify these blind spots in just a few hours and help you avoid tax reassessments costing tens of thousands of dollars.
General information provided for informational purposes only, based on known 2026 tax rules. It is not a substitute for the advice of a Chartered Professional Accountant (CPA): always consult a professional regarding your specific situation.
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