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Medical Professional Corporation Guide · Ontario · Licensed CPA

Medical Professional Corporations: Passive Income & TOSI Rules

The two rules that quietly cost incorporated physicians the most: the passive investment income grind that can strip your small business rate, and the Tax on Split Income rules that shut down dividend splitting for a medical corporation. This guide explains how each works, the Ontario twist most doctors miss, and how to plan around both. Written by a licensed Canadian CPA who works with physicians.

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A Medical Professional Corporation faces two rules that erode its tax advantage. The passive income grind cuts your $500,000 small business limit by $5 for every $1 of investment income above $50,000, wiping it out at $150,000, based on the prior year's figures. The TOSI rules tax dividends paid to most family members at the top rate, and the exception other business owners use to split income is denied to medical corporations. Both are manageable, but only with deliberate planning before year end.

Why These Two Rules Matter Most to Doctors

Incorporating a medical practice delivers two big advantages: the low small business tax rate on active income kept in the corporation, and the ability to build investments inside it with pre-tax dollars. Two rules attack exactly those advantages. The passive investment income grind can take away the low rate as your corporate investments grow, and the Tax on Split Income rules, known as TOSI, can take away the family income splitting that made retained earnings so efficient to pay out.

A physician who understands neither can watch the benefit of incorporating quietly disappear. Understanding both is what keeps the structure working. For the broader picture please see our accounting for doctors.

The Passive Income Grind: How Investments Cost You the Low Rate

A successful physician retains earnings in the corporation and invests them. That investment income is passive, and once it passes a threshold it starts eroding the small business deduction on your active practice income. This is the trap that catches doctors as their corporate portfolio grows.

Prior-Year Passive Income (AAII)Small Business Limit RemainingEffect
$50,000 or lessFull $500,000No grind, low rate preserved
$75,000$375,000$125,000 of the limit lost
$100,000$250,000Half the limit gone
$125,000$125,000Most of the limit gone
$150,000 or more$0Small business deduction eliminated

The mechanics: $5 of limit lost for every $1 of passive income over $50,000. Adjusted aggregate investment income, or AAII, above $50,000 reduces the $500,000 business limit at a five-to-one rate, reaching zero at $150,000. Where the limit is ground away, that active practice income is taxed at the general rate of about 26.5% in Ontario instead of the low 12.2%. See our active versus passive income guide.

The Timing Trap: This Year's Investments Hit Next Year's Rate

The grind is easy to misjudge because it runs a year behind. The reduction to your small business limit is based on the AAII of the immediately preceding taxation year, not the current one.

Your 2025 passive income sets your 2026 small business limit. A physician who has a strong investment year does not feel the grind until the following year, when the low rate on active income is already reduced. This lag is why the grind has to be projected ahead, not discovered after year end, and why a large capital gain realised late in a year needs to be planned with next year's practice income in mind.

The Ontario Twist Most Doctors Miss

This point alone can change how an Ontario physician plans, and it is routinely overlooked.

Ontario has not adopted the passive income grind provincially. The grind applies federally, but Ontario did not follow it, so an Ontario CCPC can lose its federal small business rate while keeping the Ontario provincial small business rate on the same income. That softens the blow compared with provinces that adopted the rule in full, and it changes the math on how aggressively a doctor needs to manage passive income. The federal cost is real, but it is not the whole 26.5%.

What Counts as Passive Income, and What Does Not

Not every dollar inside the corporation feeds the grind. Knowing what counts is half of managing it.

Counts Toward AAIIDoes Not Count
Interest from a corporate portfolioActive practice income
Portfolio dividends from public sharesIncome earned inside registered plans
Taxable capital gains on investmentsCash-value growth in permanent life insurance
Rental income (generally)Capital gains on active business shares
Aggregated across associated corporationsThe return of capital on an investment

Because passive income is aggregated across associated corporations, a physician with more than one company, or a spouse's company in the group, has to look at the whole group's investment income, not just one corporation's.

Managing the Passive Income Grind

The grind is manageable with tools that either keep investment income out of AAII or time it deliberately.

  1. Fill registered accounts first. RRSP and TFSA income does not count toward AAII, so maximising personal registered room before investing in the corporation reduces the passive pool that feeds the grind.
  2. Consider permanent life insurance. Cash-value growth inside a corporate-owned permanent policy is not AAII, so it can shelter corporate investment growth from the grind, where the insurance fits the plan.
  3. Time capital gains across years. Staggering dispositions, or bunching them into a year where the SBD is already lost, can keep AAII under the threshold in the years that matter.
  4. Use an Individual Pension Plan. An IPP moves money into a pension structure with larger deductible contributions, reducing the corporate investment pool that generates passive income.

TOSI: Why Dividend Splitting Does Not Work for a Doctor

The second rule attacks the other advantage of incorporating: paying retained earnings to family members in lower brackets. Since 2018, TOSI taxes dividends and certain other income received from a private corporation by a family member at the top marginal rate, unless the recipient fits a defined exception.

The excluded shares exception is denied to medical corporations. Most business owners can give a family member aged 25 or older a 10% stake and pay TOSI-free dividends. But the CRA definition of excluded shares specifically excludes a professional corporation carrying on the practice of a medical doctor. So the classic plan of putting 10% of the shares in a spouse's name and paying dividends does not shelter a doctor's family from TOSI. The same carve-out hits dentists, lawyers, accountants, veterinarians and chiropractors.

What Splitting Still Works for a Medical Corporation

Splitting is still possible; it just has to run through an exception a medical corporation can actually use, or a mechanism outside TOSI entirely.

RouteHow It WorksAvailable to a Doctor?
Excluded business exceptionFamily member works 20+ hours a week in the practiceYes, with documented work
Reasonable salarySalary for genuine work sits outside TOSIYes, if reasonable
Age 65 exceptionDividends to a spouse once the doctor is 65+Yes, at and after 65
Spousal RRSP and prescribed-rate loanShifts investment or retirement income to a spouseYes, outside TOSI
Excluded shares (10% stake)TOSI-free dividends on a 10% holdingNo, denied to medical corporations

The excluded business exception is the main door left open. Where a spouse genuinely works an average of 20 hours a week in the practice, doing books, billing, scheduling or administration, their dividends can escape TOSI, and once they meet the test in any five years the exclusion lasts for life. The work must be real and documented. For a fuller treatment see our income splitting for doctors guide.

How Passive Income and TOSI Interact

These two rules are usually treated separately, but for a physician they pull against each other, and that tension is the heart of the planning. Retaining earnings to invest builds the passive pool that triggers the grind. Paying earnings out to family to avoid building that pool runs into TOSI. The answer is rarely all of one or the other. It is a deliberate mix: pay enough salary and qualifying dividends to family who genuinely work in the practice, keep the corporate investment income managed with registered accounts and insurance, and time it all against the low rate you are trying to protect.

Solving one rule in isolation can worsen the other. Aggressively retaining and investing to defer tax can grind away your small business rate; aggressively paying dividends to family to keep the pool low can trigger TOSI at the top rate. The plan has to solve both together, which is exactly why physician tax planning is not a do-it-yourself exercise.

Case Study: Incorporated Physician, Ontario

A physician had built a substantial investment portfolio inside her medical corporation and was paying dividends to her non-working spouse on advice that a small shareholding would exempt them. Two problems compounded. Her prior-year passive income had climbed past $80,000, quietly grinding down her federal small business limit and pushing part of her practice income to the general rate, and the dividends to her spouse were fully exposed to TOSI because the excluded shares exception does not apply to a medical corporation. We corrected the dividend reporting, then rebuilt both sides: her spouse took on genuine documented administration of the practice to meet the excluded business exception with a reasonable salary, we shifted new investing toward registered room and a corporate-owned insurance policy to slow the passive-income grind, and we used the fact that Ontario does not apply the grind provincially to plan the drawdown. She preserved more of her low rate and split more income, on a footing that survives a CRA review. The figures here are illustrative of the work we do, not a specific client file.

Grind slowed. Splitting rebuilt on exceptions that work. Low rate largely preserved.

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Frequently Asked Questions: MPC Passive Income & TOSI

What is a Medical Professional Corporation?
A Medical Professional Corporation, or MPC, is a corporation through which a physician carries on their medical practice, permitted under provincial rules and the College. It lets a doctor access the low corporate tax rate on active income kept in the company and invest retained earnings with pre-tax dollars, subject to rules like the passive income grind and TOSI.
What is the passive income grind?
It is a federal rule, in force since 2019, that reduces a CCPC's $500,000 small business limit by $5 for every $1 of adjusted aggregate investment income above $50,000, eliminating the limit entirely at $150,000. For a physician with a growing corporate portfolio, it can push active practice income from the low rate to the general rate.
How much passive income can my corporation earn before the grind starts?
Up to $50,000 of adjusted aggregate investment income in a year with no effect. Above $50,000, the small business limit is reduced by $5 for every extra $1, so at $75,000 you lose $125,000 of limit, at $100,000 you lose $250,000, and at $150,000 the limit reaches zero and the small business deduction is gone.
What is adjusted aggregate investment income (AAII)?
AAII is the measure of passive investment income that drives the grind. It mainly includes interest, portfolio dividends from public shares, taxable capital gains on investments and generally rental income. It excludes active business income, income earned inside registered plans, cash-value growth in permanent life insurance, and capital gains on the sale of active business shares.
Why does last year's passive income affect this year's tax?
Because the grind uses the AAII of the immediately preceding taxation year, not the current one. Your 2025 passive income determines your 2026 small business limit. This lag means a strong investment year is felt on your practice income the following year, so the grind has to be projected ahead rather than discovered after year end.
Does Ontario apply the passive income grind?
No, not provincially. The grind applies federally, but Ontario did not adopt it, so an Ontario CCPC can lose its federal small business rate while keeping the Ontario provincial small business rate on the same income. This is an important nuance that softens the impact for Ontario physicians compared with provinces that adopted the rule.
What happens to my tax rate if I lose the small business deduction?
The active income that would have been taxed at the low combined rate of about 12.2% in Ontario is instead taxed at the general rate of about 26.5% federally-plus-provincially, though in Ontario the provincial small business rate can still apply because Ontario did not adopt the grind. Either way the federal portion of the low rate is lost on the ground-away amount.
Is the passive income threshold shared with other corporations?
Yes. Both the $500,000 small business limit and the passive investment income are aggregated across associated corporations. If you or a family member controls more than one company, their passive income is combined for the grind, so a group has to look at total investment income, not just one corporation's.
How can I reduce the passive income grind?
Fill personal registered accounts first since RRSP and TFSA income is not AAII, consider corporate-owned permanent life insurance whose cash-value growth is not AAII, time capital gains across years, and use an Individual Pension Plan to move money out of the corporate investment pool. The right mix depends on your numbers and should be planned before year end.
Does life insurance help with the passive income grind?
It can. The cash-value growth inside a corporate-owned permanent life insurance policy is not adjusted aggregate investment income, so it does not feed the grind. For a physician with significant retained earnings to invest, permanent insurance can shelter some corporate investment growth, where the policy genuinely fits the overall plan rather than being bought only for tax.
Do capital gains count toward the passive income grind?
Taxable capital gains on investments count toward AAII, but capital gains on the sale of active business shares do not. Because gains can be timed, staggering dispositions across years, or bunching them into a year where the small business deduction is already lost, is one of the main levers for managing the grind.
What is TOSI and how does it affect a medical corporation?
TOSI, the Tax on Split Income, taxes dividends and certain income received by a family member from a private corporation at the top marginal rate unless they meet an exception. For a medical corporation it is harsher than for other businesses, because the exception most owners rely on, the excluded shares rule, is denied to professional corporations.
Why can't a doctor use the excluded shares exception?
Because the CRA definition of excluded shares specifically excludes a professional corporation carrying on the practice of a medical doctor. So even a spouse who owns 10% or more of the votes and value cannot receive TOSI-free dividends from a medical corporation on that basis. The same restriction applies to dentists, lawyers, accountants, veterinarians and chiropractors.
Can I still split income with my spouse through my MPC?
Yes, but only through routes that work for a medical corporation: the excluded business exception where your spouse genuinely works at least 20 hours a week in the practice, a reasonable salary for real work, the age 65 dividend exception, and outside-TOSI tools like spousal RRSPs and prescribed-rate loans. The blunt dividend-sprinkling of the past no longer works.
What is the excluded business exception?
It exempts dividends from TOSI where a family member is actively engaged in the business on a regular basis, deemed met if they work an average of at least 20 hours a week. It does not depend on the type of corporation, so it is the main splitting route open to doctors, provided the work is genuine and documented, and once met in any five years it applies for life.
Can I pay my spouse a salary from my medical corporation?
Yes. Salary for genuine work sits entirely outside TOSI, so if your spouse actually does administration, bookkeeping or billing for the practice, the corporation can pay a salary that is reasonable for that work and deduct it. The pay must match what an arm's-length employee would earn for the same duties, since an unreasonable salary is disallowed.
Does TOSI still apply after I turn 65?
It eases. From the year a physician turns 65, dividends to a spouse can be received without TOSI, mirroring pension income splitting. This reopens dividend splitting with a spouse that was closed during the working years, so a doctor's plan typically shifts from the excluded business exception and salary before 65 to dividend splitting after 65.
How do the passive income and TOSI rules interact for a doctor?
They pull against each other. Retaining earnings to invest builds the passive pool that triggers the grind, while paying earnings out to family to avoid that pool runs into TOSI. The answer is a deliberate mix of managed corporate investing and splitting through routes that work, planned together rather than solving one rule in a way that worsens the other.
Should I keep investing inside my corporation or pay it out?
It depends on your numbers. Keeping earnings in the corporation defers tax but grows the passive pool that grinds your small business rate; paying them out avoids that but faces personal tax and, for family, TOSI. The optimal balance is specific to your practice income, portfolio size and family situation, and is exactly what a physician tax plan should resolve.
Can I split income with my adult children through my MPC?
Only if they qualify. An adult child who genuinely works 20+ hours a week in the practice can meet the excluded business exception, and a reasonable salary for real work is always outside TOSI. But dividends to an adult child who does not work in the practice and does not otherwise qualify are caught by TOSI at the top rate, since the excluded shares route is closed.
Does the passive income grind apply to rental income in my corporation?
Generally yes. Rental income earned inside the corporation is typically part of adjusted aggregate investment income and feeds the grind, unless it forms part of an active business. A physician holding a rental property inside the medical corporation should have its treatment reviewed, because it can affect the small business limit on practice income.
What is an Individual Pension Plan and how does it help?
An IPP is a defined-benefit pension for an incorporated professional that allows larger deductible contributions than an RRSP, especially at older ages. Moving money into an IPP reduces the corporate investment pool that generates passive income, so it helps both retirement saving and the passive income grind, and it is a common tool in a physician's plan.
How much extra tax does losing the small business deduction cost?
The immediate rate difference on the ground-away income is the gap between the low and general rates, but studies show the larger long-run cost is lost deferral, because less after-tax income stays in the corporation to compound. Over decades that difference can be very large, which is why the grind is worth managing even when the annual number looks modest.
Do I need to document my spouse's work in the practice?
Yes, thoroughly. The excluded business exception is factual, so timesheets, a defined role and evidence of work are what make it hold up. A spouse said to work in the practice with nothing behind it will fail on a CRA review, and the dividends fall back into TOSI at the top rate, often across several years. Documentation created as the work happens is essential.
Can a family trust solve the TOSI problem for a doctor?
Not on its own. TOSI is tested beneficiary by beneficiary, so a trust does not exempt a non-working beneficiary from the rules. A beneficiary who works in the practice or otherwise qualifies can receive dividends free of TOSI, while one who does not is caught. A trust can still serve other purposes, but it is not a shortcut around TOSI for a medical corporation.
When should I review these rules?
Every year, and before year end. Both the passive income grind and TOSI depend on facts that change, your investment income, your family's roles, your age, and the grind runs a year behind. Reviewing ahead of year end lets you manage capital gains, set compensation and document work in time, rather than discovering a problem after the year has closed.
How much does physician corporate tax planning cost?
Passive income and TOSI planning are part of our physician accounting work, from $150 per month, quoted as a flat fee upfront with no hourly billing. All fees include HST. Please use our pricing calculator for an exact figure.
How do I get started?
Please book a free consultation and tell us about your practice, your corporate investments, your family situation and whether anyone helps run the practice. We project the passive income grind, build your splitting on the routes that work for a medical corporation, and plan both together. Book Free Consultation →

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