Your lawyer issued non-voting shares to your spouse and adult children, and the payouts flowed for years. Then a reassessment lands, and each one is charged as though it fell into your own bracket. This expands the split-income section of our professional corporation tax planning guide.
Key Takeaways
- TOSI charges the highest marginal tax rate on most amounts a practice pays its owner’s family.
- The 10% share-ownership escape route other private corporations use is closed to a professional corporation.
- Related persons means your spouse or common-law partner, children, parents, and siblings, the same list Ontario lets hold your shares.
- Real wages, the hours threshold, and the age 65 rule still work.
What the Tax on Split Income Rules Actually Do
Since 2018, the TOSI rules in ITA 120.4 have reached any Canadian resident individual, at any age, who receives split income from a related business. Several types of income qualify: distributions and shareholder benefits from a private corporation, interest on its debt, and certain partnership, trust, and capital gains amounts. A related business is one a related person carries on or funds. Income splitting through family shares was the target.
When the rules bite, the arithmetic is blunt. Under ITA 120.4(2) the income received is taxed at the highest marginal rate, the top federal 33% plus the top provincial rate, producing 2026 Ontario tax rates of 53.53% on interest and 47.74% on non-eligible dividends, whatever the recipient’s own tax bracket would otherwise be. The dividend tax credit survives; the basic personal amount shelters nothing. Practice earnings taxed at the small business rate pay out on the non-eligible side of the eligible versus non-eligible split.
How the Income Splitting Rules Changed in 2018
Before 2018, income splitting in Canada was the default plan for owner-managed practices. Dividends moved income to family members in lower tax brackets, and the benefit of income splitting could reach five figures a year per relative. The expanded rules ended that by making every income split with a related person pass a test first. The Canada Revenue Agency’s guidance on the application of the split income rules for adults shows how auditors approach it, and amounts subject to TOSI land on the family member’s own tax return through Form T1206. Pension income splitting after 65 is a separate regime and stays available.
Why Excluded Shares Never Rescue a Professional Corporation from the TOSI Rules
Ordinary private companies get a bright-line way out. A relative aged 25 or older qualifies under the excluded shares test when three conditions hold: they own at least 10% of the votes and 10% of the value, under 90% of the company’s business income comes from services, and the company is not a professional corporation.
A practice fails twice over. Essentially all its revenue comes from services, and the statute names professional corporations directly, so that third condition is impossible. Your college also requires you to hold every voting share, so a family member could never reach the 10% vote threshold. The definitions in ITA section 120.4 spell it out.
| Exception under ITA 120.4 | Other private corporation | Professional corporation |
|---|---|---|
| 10% ownership test (age 25+) | Yes, if all three met | Never |
| Excluded business (20 hours a week) | Yes | Yes |
| Reasonable return (age 25+) | Yes | Yes |
| Age 65 rule for a spouse | Yes | Yes |
Who Counts as a Related Person When TOSI Applies
ITA 251(2) defines related as connected by blood, marriage, common-law partnership, or adoption. Blood is narrower than families assume: parents, grandparents, children, grandchildren, and siblings only. Aunts, uncles, nieces, nephews, and cousins are not related persons, so amounts paid to them sit outside these rules.
That looks like an opening until you check who may legally own the shares. Section 3.2 of Ontario’s Business Corporations Act limits non-voting shares of a medicine or dentistry corporation to the professional’s spouse, child, or parent. Everyone the regulator permits is a related person under ITA 251(2), and every relative who escapes these rules is someone your college bars from the share register. The two lists are mirror images. In our CRA representation practice, reassessments here rarely argue about who is related; they argue about whether the family member did any work.
Safe Ways to Pay Family: Wages, the 20 Hours per Week Test, and Age 65
Four routes to splitting income remain open, and each rewards evidence gathered early.
- Reasonable salary. Employment income is excluded from TOSI entirely. Pay your spouse or child for real work, keep it reasonable under ITA 67, and run it through payroll with a T4. Timesheets beat a year-end journal entry, and our corporate tax advisory reviews reset the mix annually.
- Excluded business. A family member 18 or older who is actively engaged on a regular, continuous, and substantial basis is exempt. The safe harbour is an average of 20 hours a week, in the current tax year or any five earlier tax years.
- Reasonable return. For a relative 25 or older, amounts that fairly reflect their labour, capital, and risk stay outside the rules. Document the contribution before the payment.
- Age 65. Once you reach 65 in the year, payments to your spouse or common-law partner escape TOSI to the extent they would have been excluded in your own hands. Retirement is when splitting income finally works.
A Worked Example: What One Non-Eligible Dividend Costs
Dr. Priya runs a dentistry practice through her professional corporation in Ontario, in the top bracket. She declares a $30,000 non-eligible dividend to her 22-year-old daughter, who holds non-voting shares and does no work in the practice.
- Her daughter is a specified individual and the practice is a related business, so the rules engage. The 10% ownership route is unavailable, and the reasonableness test is closed because she is 22.
- Tax on the payment: $30,000 at 47.74%, or $14,322, the identical rate Dr. Priya would have paid herself. The share structure saved nothing, and the legal fees for the class were a straight loss.
- Had her daughter genuinely averaged 20 hours a week in the practice, the excluded business exception would apply and the same $30,000 would face her own first-bracket rate of roughly 8.09%, near $2,400.
So the gap between a documented job and a paper shareholding is close to $11,900 on one payment. (Illustrative; Ontario 2026 combined rates; the daughter is assumed to have no other income.)
Frequently Asked Questions
Does TOSI apply to salary paid to a family member?
No. Salary and wages are employment income, and the tax on split income rules do not reach them. Reasonableness is the limit instead: ITA 67 lets the CRA deny your corporation’s deduction for any amount above what an arm’s length employee would earn for the same work.
Can my spouse own shares in my medical professional corporation?
In Ontario, yes: physicians and dentists may issue non-voting shares to a spouse, child, or parent. Owning shares and receiving lightly charged distributions are different questions, though, because TOSI applies its top-rate charge to most family payments unless regular work in the practice, a fair return, or the age 65 rule is met.
What are the exceptions to the TOSI rules in Canada?
The main ones are the 10% ownership test for shareholders aged 25 or older, an excluded business where the family member works an average of 20 hours a week, a reasonable return on their labour or capital, and payments to a spouse once the business owner is 65 or older. Only the first is closed to a professional corporation.
Conclusion
- These rules erase splitting income as a blanket tax strategy, and for a practice they erase the simplest exception outright.
- Ontario’s shareholder list and the ITA 251(2) related-person definition overlap almost perfectly, so share engineering does not help.
- Work and time still buy an exception: real jobs, real hours, real records.
- Your family’s ages and roles decide which exception is available, so review the structure with a CPA before the next distribution, not after the reassessment.
