TOSI Rules in Canada | Can You Pay Your Spouse or Children?

Before 2018, income splitting with family through a corporation was straightforward. Issue shares to your spouse, declare dividends, cut the household tax bill.

Then TOSI arrived, and a lot of structures that had worked for decades stopped working overnight. Here is what still works, what does not, and how to tell which side of the line you are on.

Our tax services are available in Coquitlam and other regions across British Columbia. 

Quick Answer: Salary Is Almost Always Safe. Dividends Are Where TOSI Bites.

TOSI, the tax on split income, applies the top marginal tax rate to certain income received by family members from a related business. No personal credits apply against it beyond the dividend tax credit. In BC that means roughly 54.8% on a dividend that might otherwise have been taxed at 15%.

The crucial distinction:

• Salary paid to a family member is not subject to TOSI. It is subject to a different and much more forgiving test: is the amount reasonable for the work actually performed?
• Dividends paid to a family member are subject to TOSI unless the recipient fits into one of the specific exclusions.

So if your spouse genuinely works in the business, paying them a reasonable salary is simple, deductible to the corporation, and safe. Paying them dividends requires you to land in an exclusion, and you should know which one before the cheque is written.

What TOSI Actually Does

TOSI is not a prohibition. It is a punitive tax rate.

When it applies, the amount is taxed at the highest marginal rate for the province, and the recipient cannot use their basic personal amount or most other credits against it. The whole point of splitting income, moving it to someone in a lower bracket, is eliminated.

TOSI can apply to:

• Dividends from a private corporation
• Interest on debt of a private corporation
• Income allocated from a partnership or trust connected to a related business
• Certain capital gains from the disposition of private company shares

It applies to a specified individual, essentially any Canadian resident individual who receives income from a business in which a related person is actively involved or holds a significant interest. There is no upper age limit. A 45 year old spouse is as much in scope as an 18 year old child.

Paying Salary to Family: The Reasonableness Test

This is the simplest and most reliable route, and it is underused because owners assume TOSI blocked everything.

It did not. Salary sits outside TOSI entirely. What governs salary is the general deductibility rule: the corporation can deduct an amount paid to a family member if it is reasonable in the circumstances.

What “Reasonable for Work Performed” Means in Practice

The test is straightforward. Would you pay an unrelated person the same amount for the same work?

If your spouse does the bookkeeping, invoicing, and customer scheduling for ten hours a week, what would you pay a bookkeeper for those hours in Metro Vancouver? Perhaps $35 to $45 an hour. Ten hours a week for fifty weeks is 500 hours, so roughly $17,500 to $22,500 a year is defensible.

Pay $70,000 for the same ten hours a week and CRA will disallow the excess as a corporate deduction while still taxing it in your spouse’s hands. That outcome is worse than not having paid it at all.

Some benchmarks that hold up well:

Documentation That Survives a CRA Review

Salary to a family member gets looked at. Have these ready.

• A written job description and a written employment agreement
• Timesheets or a work log. Not perfect to the minute, but real
• Actual payroll. Registered payroll account, source deductions remitted on schedule, T4 issued
• Payment into that person’s own bank account. Not yours. Not a joint account you control and they never touch
• Evidence of the work itself: emails they sent, files they created, calls they made, systems they logged into
• A note on how you set the rate, ideally with a comparable job posting saved

The single most damaging fact pattern is a family member on the payroll who cannot describe what they do. If CRA interviews them and the answers are vague, the deduction is gone and the conversation gets broader.

Paying Dividends to Family: The Exceptions You Must Fit Into

Now the harder part. A dividend to a family member is caught by TOSI unless it qualifies as an excluded amount. Here are the exclusions that matter for private company owners.

Excluded Business, the 20 Hours a Week Test

If the individual was actively engaged on a regular, continuous and substantial basis in the business in the current year, or in any five prior taxation years, dividends from that business are excluded.

There is a bright line safe harbour: working an average of at least 20 hours per week during the portion of the year the business operates automatically satisfies the test.

The five year lookback does not require five consecutive years, and the years do not have to be recent.

The Five Year Carve Out Most Owners Do Not Know About

This is the most underused provision in the entire regime, and it is worth understanding properly.

Once someone has met the 20 hour test in any five taxation years, they qualify permanently. For every year afterward, forever, regardless of whether they ever work in the business again.

The practical consequences are significant:

• A spouse who worked full time in the business from 2015 to 2019 and then stopped can receive dividends free of TOSI for the rest of their life.
• A child who worked twenty hours a week through five summers and school years while studying qualifies permanently.
• A partner who worked in the business before an illness or before starting a family retains the exclusion.

If a family member is close to five qualifying years, getting them across that threshold is one of the highest value pieces of tax planning available to a small business owner. Document the hours contemporaneously, because you will be relying on that record ten and twenty years from now.

Excluded Shares, the 10% Test

An individual aged 25 or older is excluded from TOSI on dividends if they own shares that meet all of these conditions:

• At least 10% of the votes and 10% of the value of the corporation
• Held directly, not through a trust or a holding company
• The corporation earns less than 90% of its income from services
• The corporation is not a professional corporation, meaning not an accountant, lawyer, doctor, dentist, veterinarian or chiropractor
• Less than 10% of the corporation’s income comes from a related business

Two of those conditions lock out a large share of small businesses.

The services test eliminates most consulting firms, agencies, IT services businesses, trades that are primarily labour, and similar operations. If more than 90% of revenue is for services, this exclusion is unavailable regardless of ownership percentage.

The professional corporation exclusion is absolute. A dentist cannot use excluded shares to pay their spouse dividends, full stop. This was a deliberate policy choice and it hit incorporated professionals hardest.

Note also that shares held through a family trust do not qualify. This surprises people who set up trusts specifically for income splitting, and it is why many trust structures were unwound after 2018.

Age 65 and the Spousal Exception

Once the principal owner turns 65, TOSI no longer applies to amounts paid to their spouse or common law partner, provided the amount would have been an excluded amount had the principal owner received it directly.

This aligns the treatment of business income with pension income splitting, which also starts at 65. It is a genuinely valuable planning point, and it means a strategy that does not work at 62 works cleanly at 66.

It applies in the year the owner turns 65, not the year after.

Reasonable Return, the Catch All

If none of the specific exclusions apply, there is a facts and circumstances test. An amount is excluded if it represents a reasonable return on the individual’s contributions, measured against four factors:

1. Work performed for the business
2. Property contributed, including capital invested
3. Risks assumed, such as personal guarantees or pledged assets
4. Amounts previously paid or received in respect of the business

For individuals aged 18 to 24 the test is much tighter, limited to a prescribed rate return on arm’s length capital actually contributed.

The reasonable return test is genuinely useful for someone who invested real money or personally guaranteed the company’s debt, but it is subjective, and CRA has given limited guidance on how the factors are weighted. Relying on it means being able to defend it, so document contributions carefully.

Can I Pay This Family Member a Dividend? A Decision Path

Work through these in order. The first yes ends the analysis.

1. Is the recipient the spouse of an owner aged 65 or older? → Excluded.
2. Did the recipient work an average of 20 hours a week in the business this year, or in any five prior years? → Excluded under the excluded business rule.
3. Is the recipient 25 or older, holding 10% of votes and value directly, in a company that is not a professional corporation and not primarily a service business? → Excluded under excluded shares.
4. Can you demonstrate a reasonable return on genuine work, capital, or risk assumed? → Possibly excluded, but be ready to defend it.
5. None of the above? → TOSI applies. Pay a reasonable salary for actual work instead, or do not pay at all.

Common Structures and Whether They Work

Spouse Owning 25% of a Consulting Corporation

Spouse does not work in the business. Corporation earns essentially all income from consulting services.

Excluded shares fails on the services test, regardless of the 25% holding. Excluded business fails because they do not work there. Reasonable return is weak with no work, no capital and no risk.

Verdict: TOSI applies. Very common structure, very commonly offside.

Adult Child at University Holding Shares

Child is 21, holds shares, does not work in the business.

Under 25, so excluded shares is unavailable. Not working, so excluded business fails. The reasonable return test for 18 to 24 year olds is limited to a prescribed rate return on capital they actually contributed, which is usually nothing.

Verdict: TOSI applies. Better approach: employ them for real work at a reasonable wage during summers and school terms, which also starts building years toward the five year excluded business carve out.

Retired Parent Who Funded the Startup

Parent lent or invested $200,000 fifteen years ago, took real risk, does not work in the business now.

Reasonable return is the strongest argument here, based on property contributed and risks assumed. If they are 25 or older and hold 10% of votes and value directly in a non service, non professional corporation, excluded shares may also apply.

Verdict: often workable, with proper documentation of the original contribution and the risk taken.

Spouse Who Does the Bookkeeping Part Time

Spouse works about eight hours a week.

Eight hours does not meet the 20 hour safe harbour, so excluded business is uncertain unless you can show the involvement is regular, continuous and substantial relative to the size of the business, which is a harder argument.

Verdict: pay salary, not dividends. A reasonable salary for eight hours a week of bookkeeping is entirely defensible, deductible to the corporation, builds RRSP room and CPP, and sits completely outside TOSI. This is the right answer for a very large number of small businesses.

What CRA Looks For on Review

When TOSI is examined, the questions are consistent.

• Can the family member describe their role? In their own words, without coaching.
• Do the hours have contemporaneous support? Calendars, timesheets, emails, system logs. Records created after the fact carry little weight.
• Was the money actually received by that person? Into their own account, under their own control.
• Does the share ownership match the paperwork? Share register, directors’ resolutions, subscription documents, and the amount actually paid for the shares.
• What did they pay for their shares, and with whose money? Shares subscribed for a nominal amount funded by the principal owner weaken every argument.
• Is the business a service business? CRA will test the 90% threshold directly.

The theme is substance. Structures that exist only on paper do not survive.

Frequently Asked Questions

Can I split income with a minor child?

No. Dividends to a minor from a private corporation have been subject to the top rate since long before TOSI, under the old kiddie tax rules that TOSI absorbed. You also cannot generally employ a very young child at a meaningful wage. Family trusts do not solve this.

Does TOSI apply to a family trust?

Yes. Income allocated through a trust to a beneficiary is subject to TOSI in the beneficiary’s hands, and shares held through a trust do not qualify for the excluded shares exemption. This is why many family trust structures were restructured after 2018. Trusts remain useful for capital gains exemption multiplication and estate planning, just not for ongoing dividend splitting.

What if my spouse contributed capital but does not work in the business?

The reasonable return test can support a return on genuinely contributed capital, weighing property contributed and risks assumed. It is fact dependent. Document what was contributed, when, from whose funds, and what risk was taken, including any personal guarantee.

Is TOSI going away?

There is no indication of that. The rules have been in place since 2018 and have been refined rather than relaxed. Plan on the assumption that they are permanent.

Can I pay my spouse a salary instead?

Yes, and for most small businesses this is the better answer. Salary is outside TOSI, deductible to the corporation, and builds RRSP room and CPP. It just has to be reasonable for the work actually done and run through real payroll.

Does the 20 hours a week have to be every week of the year?

It is an average over the portion of the year the business operates. A seasonal business that runs six months requires the average across those six months. Consistency matters more than any single week.

Do the five years for the excluded business exception have to be consecutive?

No. Any five taxation years count, and they do not have to be recent. Once the five years are met, the exclusion is permanent.

What is the tax cost if TOSI applies?

The top marginal rate for the province, with no personal credits available beyond the dividend tax credit. In BC that is roughly 54.8% on non eligible dividends, compared with as little as 15% or less for a low income recipient. On a $50,000 dividend the difference can exceed $20,000.

Am I safe if my spouse is a director?

No. Being a director is not the same as being actively engaged in the business. Directorship alone does not satisfy the excluded business test.

What about paying my adult child who works full time in the business?

Excellent. Twenty hours a week or more satisfies the excluded business test for the current year, and every year they work moves them toward the permanent five year carve out. Pay a reasonable salary as well. Document the hours.

Structure Your Family Compensation Properly

The short version, if you take nothing else away:

• Salary for real work is safe, deductible, and underused. Start here.
• Dividends require an exclusion. Know which one you are relying on before you declare.
• The five year excluded business rule is permanent. If a family member is close, get them across the line and keep the records.
• Age 65 changes the analysis for a spouse. Revisit the plan then.
• Documentation is the whole game. Contemporaneous, specific and consistent.

Maxpro Financials provides corporate tax planning, payroll, owner compensation strategy and CRA review support to incorporated business owners across BC, Alberta, Saskatchewan and Ontario.

This article is general information current as of 2026 and is not tax advice for your specific situation. TOSI is highly fact dependent, so obtain advice tailored to your circumstances before making distributions.