Income Splitting for Canadian Business Owners
Legal strategies for splitting income with family members in Canada — dividends, salary, prescribed rate loans, and TOSI rules.
Income splitting lets Canadian business owners shift some of their income to family members in lower tax brackets, reducing the family's overall tax bill. But the Tax on Split Income (TOSI) rules have made this trickier than it used to be. Here is what still works, what does not, and how to plan within the rules.
How TOSI Changed the Landscape
TOSI (Tax on Split Income), introduced in 2018, applies a flat top marginal rate to certain payments, dividends, and capital gains received by family members from a business in which they do not meaningfully contribute. This effectively killed many traditional income splitting arrangements for families with non-active family members.
However, TOSI includes several important exceptions and safe harbours. Dividends paid to a spouse or adult child who works an average of 20 hours per week in the business are fully exempt. Spouses aged 65+ also have broader exemptions.
If a family member aged 18 or over works an average of 20 hours per week in the business, dividends paid to them are TOSI-exempt. Document the hours — CRA may ask.
Prescribed Rate Loans
- Loan a family member funds at the CRA's prescribed rate (2% as of 2025). They invest the money, and any income earned above the interest paid stays in their hands at their marginal rate.
- The prescribed rate is set quarterly. Locking in a multi-year term fixed at the rate in effect when the loan is made protects you from future rate increases.
- A spousal loan works the same way — interest paid on the prescribed-rate loan is deductible to the spouse who borrows it and taxable income to the lending spouse.
Salary to Family Members
Paying a reasonable salary to a spouse or child for actual work performed in the business is one of the most straightforward income-splitting strategies. The salary must be commensurate with the work done — CRA reviews reasonableness closely.
A salary to a child 18 or under is still subject to the personal basic exemption (approximately $15,705 for 2025), meaning they can earn that much tax-free. For children over 18, the salary is taxed at their marginal rate.
Family Trusts and Estate Freezes
- A family trust with discretionary beneficiaries allows trustees to allocate income or capital gains to lower-income family members each year.
- An estate freeze involves exchanging growth shares for fixed-value shares, so future appreciation accrues to the next generation — often done through a family trust.
- TOSI applies to trust allocations in many scenarios, but the 20-hour exemption and the exclusion for adult beneficiaries (25+) with diversified holdings remain available.
Attribution Rules — The Other Constraint
Even without TOSI, the attribution rules can reattribute income back to the higher-earning spouse if property is transferred directly (or via a low-interest loan) below fair market value. The prescribed rate loan structure is the main way to avoid attribution without running into TOSI.
Attribution does not apply to loans that bear interest at the prescribed rate and are documented with a proper loan agreement and annual interest payments.
Key Takeaways
- 1TOSI applies top marginal rates to income split with non-active family members — know the exemptions.
- 2The 20-hour-per-week safe harbour exempts dividends to working family members aged 18+.
- 3Prescribed rate loans to family members are still an effective strategy (2% rate as of 2025).
- 4Reasonable salaries to family members for actual work avoid TOSI and attribution rule problems.
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