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The tax on split income (TOSI) prevents business owners from sprinkling income from a private business to family members in lower tax brackets. Income subject to TOSI is taxed at the top federal rate (33 percent) and top provincial rate, with no access to most credits other than the dividend tax credit and disability credit. It is calculated on Form T1206.
WHAT INCOME CAN BE AFFECTED
Taxable dividends from private corporations.
Shareholder benefits, and income from partnerships or trusts that derive income from a related business.
Interest on loans to related private corporations, partnerships or trusts.
Taxable capital gains on the disposition of shares of private corporations (in certain cases).
MAIN EXCLUSIONS
Excluded business: the individual (18 or older) was actively engaged on a regular, continuous and substantial basis in the business in the current year or any five previous years. Working at least 20 hours per week during the portion of the year the business operates is a safe harbour.
Excluded shares: the individual is 25 or older and owns shares with 10 percent or more of the votes and value of a corporation that is not a professional corporation and earns less than 90 percent of its income from services.
Reasonable return: for individuals aged 25 or older, amounts that are a reasonable return based on labour and capital contributed.
Spouse of an owner 65 or older: income is excluded if it would have been excluded for the older spouse.
Return on capital: for individuals aged 18 to 24, a prescribed-rate return on arm's-length capital contributed.
Capital gains on qualified small business corporation shares and qualified farm or fishing property, and property received on death or marriage breakdown.
WHO IS MOST AFFECTED
Family members under 25, spouses not active in the business, and owners of professional corporations whose family members hold shares.
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