Today, we will discuss what the tax on split income (TOSI) rules are, specifically how TOSI rules affect your ability to pay dividends to your spouse and other adult family members. In the past, being an owner of an incorporated business in Canada, you could save taxes by splitting your income with an adult family member. This was usually done by issuing dividends to a spouse in a lower personal tax bracket.
TOSI introduced a new set of rules that reduced this benefit.
While you will get a good explanation of how TOSI works, it is always recommended to consult with a tax professional before paying out dividends to your spouse.
What is TOSI?
TOSI is a set of tax rules that came into effect on January 1st, 2018. These rules were made to limit the benefit of income splitting through private corporations. TOSI rules apply when the income recipient is an adult family member who has not made a significant contribution to the business.
TOSI removes the split income tax benefits by identifying specific methods of income splitting, which had previously reduced taxes, and taxing that split income at the taxpayer’s highest rate. The rules are complex as they apply to dividend and interest income but not salaries that are paid by a private corporation.
Can you Still Pay Dividends to your Spouse?
Yes, but in certain situations, there will be negative tax consequences. Here are some of the most common scenarios and whether or not the negative tax effects of TOSI will apply to them.
Excluded Business
“Excluded businesses” is a scenario in which TOSI would not apply, if you pay dividends during this situation, then your spouse will be safe from tax on split income. To be considered as an excluded business, your spouse will have needed to provide sufficient contribution to the business.
What is a Sufficient Contribution?
An example of a sufficient contribution to the business would be if the spouse worked 20+ hours per week in the current year, or 20+ hours a week for a total of five years, which do not have to be in succession.
How do you Show Proof of an Excluded Business?
The most efficient way to show that your spouse has met the excluded business criteria is to keep records such as timesheets.
Excluded Shares
This exclusion from TOSI is more complicated, so here are the criteria that must be met for it to apply. An exclusion from TOSI can only be accomplished if all of the following criteria are met:
- Spouse is 25 years or older
- The spouse shareholder owns at least 10% of the voting shares
- The spouse shareholder’s ownership represents at least 10% of the value of the corporation
- Less than 90% of the corporation’s revenue is from the provision of services
- The corporation is not a professional corporation
- No more than 10% of the company’s revenue is earned from a related business
