TOSI Exposure Checker: Will Your Spouse’s Dividend Be Taxed?
A dividend to a spouse, adult child or parent is taxed at the top marginal rate unless one of the exclusions applies. Work through each test, see which one you meet or fail, and what the dividend costs if none of them lands.
extra tax if TOSI applies
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Each Exclusion, Tested
| Exclusion | What It Requires | Your Position | Result |
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What the Dividend Costs
| Item | Basis | Amount |
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What Would Have to Change
| Route | What It Would Take | Available Here |
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Points That Decide This
What to Do Next
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Disclaimer: The tax on split income in section 120.4 of the Income Tax Act applies to split income of a specified individual, taxing it at the top marginal rate, unless the amount is an excluded amount. The main exclusions include an excluded business, where the individual was actively engaged on a regular, continuous and substantial basis in the activities of the business in the year or in any five prior taxation years, with a deeming rule where the individual works an average of at least twenty hours per week during the portion of the year in which the business operates; excluded shares, available to individuals aged twenty-five or over, requiring shares representing at least ten per cent of votes and at least ten per cent of fair market value in a corporation that does not derive all or substantially all of its income from the provision of services, is not a professional corporation, and does not derive all or substantially all of its income from another related business; a reasonable return having regard to work performed, property contributed, risks assumed and amounts previously paid, available in full to individuals aged twenty-five or over and in a restricted form for individuals aged eighteen to twenty-four; a safe harbour capital return for individuals aged eighteen to twenty-four based on the prescribed rate applied to arm’s length capital contributed; and an exception where the individual is the spouse or common-law partner of an owner who was aged sixty-five or over in the year and the amount would have been an excluded amount for that owner. Further exclusions apply to certain inherited property, taxable capital gains and amounts received on death or marriage breakdown, which are not modelled here. Whether a particular return is reasonable, whether income is all or substantially all from services, and whether engagement is regular, continuous and substantial are questions of fact that this page cannot determine. Rates are editable inputs that should be confirmed. This page is general information, not tax advice.
The Default Is That It Applies
Since 2018, a dividend paid to a family member who is not involved in the business is taxed at the top marginal rate regardless of that person’s other income. The rules start from the position that the amount is caught, and then ask whether an exclusion rescues it.
That is the mental shift most owners have not made. The old approach of issuing shares to a spouse and paying them dividends to use up their lower brackets does not work on its own any more. Something has to take the payment out of the rules.
The cost of being wrong is severe. A dividend that would have been taxed at single digits in the recipient’s hands is taxed at close to half. On sixty thousand dollars that is a swing of more than twenty thousand, and it is assessed against the recipient rather than the corporation.
The Twenty-Hour Test Is the Cleanest Route
An individual actively engaged on a regular, continuous and substantial basis is outside the rules. Working an average of at least twenty hours a week during the operating part of the year is deemed to meet that, which makes it the one test with a bright line rather than a judgment.
It also has a memory. Once the test has been met in any five taxation years, it is met permanently, so a spouse who worked in the business for five years and has since stepped back remains excluded on that basis.
Twenty hours is the safe harbour, not the requirement. Fewer hours can still amount to regular, continuous and substantial engagement, but then it is a question of fact rather than a deemed answer, and it needs evidence. Timesheets, a calendar, emails and a job description are what turn an assertion into a position.
Excluded Shares Have Four Conditions, Not One
The excluded shares test is the one most often half-remembered. People recall the ten per cent and forget the rest.
| Condition | Requirement |
|---|---|
| Age | Twenty-five or over |
| Votes | At least ten per cent |
| Value | At least ten per cent of fair market value |
| Business type | Not a services business, not a professional corporation |
Votes and value both have to be met. Non-voting shares carrying twenty per cent of the value fail, and that is the most common structure in owner-managed companies, because non-voting shares were exactly what people used to issue to spouses.
The services exclusion shuts this route for most professionals. A consultancy, a medical or legal practice, an agency: where all or substantially all of the income comes from providing services, excluded shares are not available no matter how the shares are held. For those businesses the engagement test or a reasonable return is the only way through.
Reasonable Return Is a Judgment, Not a Formula
An amount that is a reasonable return having regard to the work performed, the property contributed, the risks assumed and amounts previously paid is excluded. There is no percentage and no table; it is assessed on the facts.
For someone aged twenty-five or over the full test is available. For an adult aged eighteen to twenty-four it is restricted, and the practical route at that age is the safe harbour capital return, which is the prescribed rate applied to capital they genuinely contributed from arm’s length sources.
The Age 65 Exception
Where the owner is sixty-five or older in the year, amounts received by their spouse are excluded if they would have been excluded amounts for the owner. This aligns the treatment with pension splitting and is deliberately generous.
It is worth knowing about in advance because it changes the answer completely in the year the owner turns sixty-five, and a dividend policy set up years earlier may become considerably more efficient at that point without anything else changing.
What Usually Goes Wrong
- Non-voting shares, which fail the votes half of the excluded shares test
- A services business, where excluded shares are unavailable regardless of holdings
- Hours that were worked but never recorded, leaving no evidence of engagement
- Assuming a small dividend is safe, when the rules have no minimum threshold
- Capital contributed from a gift by the owner, which is not arm’s length capital
- Restructuring after the year end, when the tests are applied to the year itself
The fix usually has to happen before the dividend, not after. Our tax planning service covers testing each exclusion on your facts, restructuring shares where that is what the excluded shares test needs, and documenting engagement properly so the position is evidenced rather than asserted.
Frequently Asked Questions
Common questions on the tax on split income.
Related Calculators and Guides
More tools for owner compensation.
Check Before the Dividend Is Declared
Send us the share register, what each family member actually does in the business and what you are planning to pay them. We will test each exclusion on your facts, tell you which one you can rely on, and set out what would have to change where none of them currently applies.