Income Tax Update: Income Sprinkling – Tax on Split Income (TOSI)

On December 13, 2017, the Department of Finance released revised draft legislative proposals on income sprinkling.  The new rules were passed into law on June 21, 2018, with only a few minor modifications to the December proposals, and are effective January 1, 2019.

The government’s objective is to eliminate the tax benefits of income splitting where the recipient of the income (a related family member) has not made a sufficient contribution to the family business.

The TOSI rules will potentially apply to essentially any income amounts, dividends and capital gains that are considered “split income.” This generally includes the following:

  • Dividends and shareholder benefits from a private company;
  • Income received from a partnership or trust where the income was derived from a related business or the rental of property in certain cases;
  • Income on certain debt obligations (e.g., interest); and
  • Income or gains from the disposition of certain property disposed of after 2017.

However, the rules provide a number of exclusions as follows:

  1. Exclusion from TOSI for adult individuals (18 years or older) who contributes labour to a related business on a regular, continuous and substantial basis (Excluded Business). This can be proven on a factual basis or by meeting a threshold if the family member has worked at least 20 hours a week on average in 5 years at any time in the past, any dividends they receive now or in the future from the family business will generally not be subject to TOSI.


  1. Exclusion from TOSI for individuals over the age of 24 who have a significant equity investment in a corporation, other than a corporation that carries on a services business or is a professional corporation (Excluded Shares). This means that the individual must hold shares that represent at least 10% of the votes and value of the company (these shares can be separate from the excluded shares of the company). In addition to this requirement, the exclusion only applies to shares of corporations where less than 90% of the business income of the corporation is from the provision of services, and where 90% or more of all the income of the corporation is not derived directly or indirectly from one or more other related businesses of the individual (outside of the corporation). Also, excluded shares also do not include shares of a professional corporation.


  1. Exclusion from TOSI for individuals over the age of 24 that meet a reasonable returns test. This reasonable return will consider several factors including the work performed for the business. The other factors include the property contributed by the individual to the business, the risks assumed by the individual in respect of the business, the historical payments that have been made to the person in the past for their contributions, and other relevant factors.

Other relevant factors:

  • Generally, TOSI will not apply to capital gains that qualify for the Lifetime Capital Gains Exemption. This will enable families to continue to plan to use the Lifetime Capital Gains Exemption.
  • Removal of aunts, uncles, nieces, and nephews from the specified individual definition for purposes of TOSI.
  • No application of TOSI to compound income (i.e. income earned from the investment of income previously subject to TOSI).
  • TOSI will not apply to income received by an individual from a related business if the individual’s spouse made the contributions to the business and is at least 65 years old in the year the amounts are received.
  • The beneficiaries of a deceased individual’s estate can avoid the TOSI rules based on the contributions of the deceased individual.
  • The income derived from property acquired because of a marriage breakdown will be exempt from the TOSI rules.