Tax on income split with family members
Tax on split income (TOSI)
Section 120.4 applies the top marginal tax rate to "split income" received by adult and minor family members — targeting income-splitting strategies using private corporations, partnerships, and trusts.
Plain-language explanation
Section 120.4 (commonly called the "TOSI" rules or "kiddie tax") prevents high-income individuals from reducing their family's tax burden by directing income to lower-income family members through corporations, partnerships, or trusts.
What is split income: "Split income" is broadly defined and includes: dividends from private corporations, interest income from related-party loans, income from partnerships or trusts if the individual does not perform "excluded services," and capital gains from selling private corporation shares to non-arm's-length persons.
How TOSI works: Income that qualifies as "split income" is taxed at the top federal marginal rate (33%) regardless of the recipient's actual income level. Provincial tax is added on top. There is no basic personal credit, no dividend tax credit, and no other credits available against the TOSI tax.
Exclusions (safe harbours): Split income rules do not apply to "excluded amounts" — income that is reasonable in the circumstances. Adult family members who are actively engaged in the business (contribute labour, bear risk, provide capital) may receive reasonable amounts free of TOSI. The "reasonableness" test considers the role, time spent, and comparable arm's-length compensation.
Minors vs. adults: For adults aged 18+, the rules are complex and depend on whether the family member is engaged in the business. For minors (under 18), virtually all dividends and certain other income from family-owned corporations is subject to TOSI.
Example
Dr. Patel owns a medical corporation and pays his 19-year-old son $50,000 in dividends. If his son does not work in the business, all $50,000 is "split income" subject to top-rate tax (≈ 54% combined federal/Ontario). Had the son performed significant work, up to a "reasonable" amount could escape TOSI.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
Major TOSI expansion in Budget 2017 / effective 2018 extended split income rules to all adult family members (not just minors), with exclusions for those who are active in the business. Most controversial private corporation tax reform in decades.
Common questions
Can I pay my spouse a salary from my corporation without triggering TOSI? +
A reasonable salary for work actually performed is not split income — it is employment income. TOSI targets dividends and passive investment income, not arm's-length compensation. Your spouse's salary must be reasonable for their actual contribution (commensurate with what you'd pay an unrelated employee for the same work).
Are loans to family members subject to TOSI? +
Interest income earned by a family member on a loan from a private corporation (or from you personally) where the rate is non-commercial can be split income. However, if the loan charges at least the CRA prescribed rate (currently published quarterly), the interest income is generally not split income.
Key terms
Related sections
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 120.4. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.