TOSI (split income tax)

The TOSI (Tax on Split Income) is a rule that levies the highest tax rate on money, especially dividends (a share of a company's profits paid to its owners), that an entrepreneur pays to a relative who is not actively involved in the business. It has been in effect since 2018.

Brief

Applies to dividends (shares of a company's profits) and certain income paid to a close relative
The money is taxed at the highest rate, regardless of the actual income of the person receiving it.
Main exit strategy: the relative actually works in the company, at least 20 hours per week
Other exceptions: the entrepreneur's spouse is 65 years of age or older, or a close relative holds "excluded shares" (a significant share of a common company, at age 25 and older)

Why does this matter?

Imagine a restaurant owner paying $40,000 in dividends (a share of the profits) to their student son, who never sets foot in the restaurant, simply to take advantage of the lower student tax rate. Before 2018, this was permitted. The TOSI (Tax on Social Security Contributions) closed this loophole: that same dividend would now be taxed at the highest rate, sometimes over 50%, in the son's hands. Legitimate exceptions remain, especially when the relative actually works in the business. Before paying a dividend to a family member, have their eligibility verified: mistakes can be costly. Bankeo will connect you with a verified accountant/CPA free of charge to structure your family's compensation without any unpleasant surprises, and we'll be there to support you every step of the way.

Frequently asked questions

What is TOSI, in one sentence?

This rule prevents an entrepreneur from "shifting" their income to a relative who is not very active in the business simply to pay less tax. When this rule applies, the money paid to the relative (often a dividend, i.e., a share of the profits) is taxed at the highest rate, without any tax benefits.

What are the main exceptions?

The following are exempt: a close relative who works an average of at least 20 hours per week in the business (during the year or the last five years); someone who holds "excluded shares" (at least 10% of the voting rights and value of a non-professional corporation, aged 25 and over); and the spouse of a business owner aged 65 or over. In these cases, the normal rate applies.

Is it still possible to share income within your family?

Yes, but within a framework: a reasonable salary for real work, the exceptions of the TOSI (Tax-Free Social Security Scheme), an RRSP (Retirement Savings Account) and a TFSA (Tax-Free Savings Account) in each person's name remain legitimate options. Everything is decided on a case-by-case basis. Bankeo will introduce you to a verified accountant/CPA free of charge to structure your family's compensation without any unpleasant surprises, and we'll be there to support you.