TOSI: the rules on paying dividends to family members

For years, paying dividends to a lower-income spouse or adult child was one of the simplest tax moves available to an incorporated business owner. That changed. The tax on split income — TOSI — rules were expanded significantly in 2018, and they turned income splitting from a formality into something that has to be earned and documented. If you're paying, or thinking about paying, dividends to family members who are shareholders, understanding TOSI isn't optional.

What TOSI actually does

TOSI exists to stop “income sprinkling” — routing dividends or other income to family members in lower tax brackets purely to reduce the family's overall tax bill, regardless of what those family members actually contributed. Where TOSI applies, the split income is taxed at the top personal marginal rate, which typically eliminates the benefit of paying it to someone in a lower bracket in the first place. TOSI doesn't ban paying dividends to family members — it just removes the tax advantage unless you can point to a recognized exception.

Who TOSI can reach

TOSI generally applies to dividends and certain other amounts received by an individual from a private corporation that's connected to a family member — a spouse or common-law partner, a child, or other related individuals — who is or was actively involved in that business. It doesn't matter that the payment is legally structured as a dividend on shares the family member owns; if the underlying relationship and involvement don't meet an exception, TOSI can still apply.

The main exceptions, in plain language

TOSI includes several carve-outs. None of them are automatic — each has to be met and, ideally, documented as the year goes.

• Excluded business. If the family member is actively engaged in the business on a regular, continuous and substantial basis — generally understood as averaging at least 20 hours a week during the year, or having done so in any five earlier years that don't need to be consecutive — dividends to them can be excluded from TOSI.
• Excluded shares. Available generally to shareholders who are 25 or older, hold a meaningful, direct equity stake, and meet specific tests around the type of income the corporation earns. This exception looks at the shares themselves rather than hours worked.
• Reasonable return. For some family members, particularly those in their late teens or twenties who don't clearly meet the excluded-business or excluded-shares tests, a facts-based “reasonable return” analysis looks at what they actually contributed — labour, capital, or risk — relative to what they received.
• Retirement. Dividends to the spouse of someone who was actively engaged in the business before reaching a certain retirement age can, in some circumstances, remain excluded from TOSI.
• Inherited property. Shares received as a result of someone's death can sometimes retain their excluded status in the hands of the person who inherited them.

Every one of these exceptions is fact-driven. None of them is satisfied just by the corporate registry listing a family member as a shareholder.

Why “just put my spouse on the shares” isn't safe advice anymore

Before TOSI was broadened, the mechanics of income splitting were mostly about share structure: issue the right class of shares to the right family member, and dividends could flow at their lower rate. That's no longer sufficient. Now the corporation, and the family member receiving the dividend, need to be able to show — if CRA asks — which exception applies and why. A spouse who does the books for two hours a week, or an adult child whose name is on the share register but who has never worked in the business, is exactly the profile TOSI was designed to catch.

Documentation matters as much as the plan

Because these exceptions turn on facts — hours worked, role, capital contributed, timing of involvement — the paperwork you'd want in an audit is the same paperwork that should exist from day one: timesheets or a record of hours, a description of the family member's role, meeting minutes if capital or shares changed hands, and clarity on how compensation was decided. Waiting until CRA asks is the wrong time to start building that record.

The bottom line

TOSI didn't end income splitting for family businesses, but it did end the era where it was a simple structuring exercise. Before paying — or continuing to pay — dividends to a spouse, child, or other family shareholder, it's worth confirming which exception you're actually relying on and whether you can support it. That review pairs naturally with a broader look at salary versus dividends for your own compensation, since the two decisions usually get made together.

This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and it does not create a client relationship. Tax rules change and your situation is unique — please speak with a CPA before acting on anything here.

About the author

Sunny Dhillon, CPA

Founder of EverStone CPA, an Abbotsford CPA firm, and a member of the Chartered Professional Accountants of British Columbia (CPABC). Sunny works with incorporated contractors and small business owners across Canada on tax, bookkeeping and advisory. More about Sunny →