My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, January 1, 2018

The Revised Tax On Split Income Rules

On December 13, 2017 the Liberals released a new and improved version of their income sprinkling/tax on split income (“TOSI”) proposals. The government’s backgrounder stated, “the revised draft legislative proposals include changes to better target and simplify their application”. I can agree with the targeted assertion; as some overly expansive drafting was corrected, but simplification, not in my world.

The new rules while more objective than the previous version, are still very subjective. In my opinion these revisions will just create more angst among the small business owners caught by these proposals and will result in court cases for years. Add in that these rules were released the week before the Christmas holidays and not issued in conjunction with the passive income rules that are supposedly to come in the next budget (planning for dividends may be dependent or intertwined with the final passive rules) and I don’t think the Finance Minister will be winning any politician of the year awards from any private business associations.

In my opinion, all these TOSI rules would not be necessary if the government would have simply disallowed income sprinkling for anyone under age 25 that that does not work full-time in a business and for all Canadians (whether business owners or not) started taxing spouses as a single-family unit. But then, nobody asked me.

Today, I will summarize whom I see as the winners and losers of these new proposals and those caught in the grey area. Finally, I will provide some details on the revisions to the TOSI rules.

As this legislation is new and will likely still require some clarification, I want to make it clear that this post is solely for general information purposes. You should consult with your professional advisor, so they can review these proposals based on your specific fact situation.



1. Business owners over 65

2. Individuals who inherited shares of a small business

3. Businesses where shares, votes and value are allocated evenly among family members and are not service businesses

4. Canadians who work at least 20 hours a week on a regular and continuous basis in the family business

5. Retired owners that were caught under the initial rules because they were considered related even though an arm’s length person now ran the corporation


1. Beneficiaries of shares held by Family Trusts

2. Professionals

3. Small businesses that provide services and do not sell products

4. Estate freezes recently undertaken and/or where there is large redemption value remaining in the preference shares issued upon the freeze


1. Families were shares have already been distributed from a trust or were purchased upon incorporation and the parents have voting control

2. Estate freezes where most shares have been redeemed

The New Rules

The new rules are very detailed and I do not intend to regurgitate all of them here. I will summarize the rules only at a high level. For details and FAQ’s, please see this CRA link  (scroll half-way down the page to related products and you will see guidance and other more technical material).

The new rules have four key exclusions: 1. An excluded share test 2. Excluded business test 3. Reasonable rate of return test and 4. Retirement and inheritance exclusion.

I will summarize them below and discuss how they may affect you.

Excluded Shares- The share ownership test

The TOSI rules will not apply where you have attained the age of 25 and all of the following conditions are met:

  • You own at least 10% of the outstanding shares of a corporation in terms of votes and value and the corporation meets all the following conditions:

(a) It earns less than 90% of its income from the provision of services

(b) It is not a professional corporation

(c) All or substantially all its income is not derived from a related business

At first blush, this test seems like a god-send for private corporations where family members are shareholders and have attained the age of 25. However, in many cases the parents have the majority of the voting rights and may have significant value in preference shares as result of a prior reorganization or estate freeze. Where the issue is only votes, you may be able to reorganize your corporate share structure to meet this condition as the government has stated that even though the rules are applicable January 1, 2018, you have until December 31, 2018 to get your corporate house “in order”.

This rule will essentially preclude the use of family trusts for income splitting purposes other than the capital gains exemption. It is important to note, that the TOSI rules will not apply to capital gains on the sale of qualified farm or fishing property and to the sale of qualified small business corporations (“QSBC”). Most private corporation owners reading this blog post have shares that either qualify as QSBC shares, or can be made to qualify for the capital gains exemption through a purifying transaction (see this post I wrote on this topic). The exclusion for the sale of these shares is not age dependent (however, where an individual is under 18 and the sale is to a related party, the exemption will be problematic). Not that I want to look a gift horse in the mouth, but we have all these complex rules to prevent income sprinkling and you are still allowed to allocate the 2018 exemption amount of $848,252 to a minor?

Professional corporations are excluded, as they have been one of the main targets of the Liberals throughout this whole debacle. However, pay careful attention to the word “services”. At first glance you think services is just another arrow aimed at professionals, but services as written (it is not defined anywhere) would seem to include the services of a barber, gardener, massage therapist, computer consultant etc. Many small businesses may not meet this exclusion if they don’t earn at least 11% of their revenue from the sale of products. In my opinion, this provision may “blow-back at the government once it is better understood; assuming the literal interpretation is the proper reading. It should be noted that if you and your spouse/children 18 years old and over meet the labour criteria for the excluded business test based discussed below, then having a service business will not in itself preclude you from income sprinkling.

The related business in (c) above is just a provision to ensure a service business does not impose another business between it and the family member to get around the rules, although, some tax observers are concerned this provision could accidentally cause issues where shares are held through a holding company. This is one area that the Liberals will need to clarify.

Excluded Business –The labour test

The TOSI rules will not apply where you are 18 or over and have been employed by an excluded business, which is “a business in which the individual is actively engaged on a regular, continuous and substantial basis in the taxation year of the individual in which an amount is received or in any five previous taxation years". The CRA states that “To access the exclusion in respect of five previous years of labour contributions, it is not necessary that the five previous years be consecutive or after 2017. Any combination of five previous years would satisfy the test”. The test will also account for businesses’ that are seasonal, such that the test will apply to the seasonal period

Finally, the CRA says “To provide greater certainty (but without limiting the generality of the test), an individual who works an average of 20 hours per week during the part of the year that a business operates will be deemed to be actively engaged on a regular, continuous and substantial basis for the year. If an individual does not meet the 20-hour threshold, then it will be a question of fact as to whether the individual was actively engaged in the business on a regular, continuous and substantial basis. However, even if an individual aged 25 or older does not meet the regular, continuous and substantial threshold, the TOSI will apply to amounts derived from a related business only to the extent that they are unreasonable (i.e., only the unreasonable excess will be subject to the TOSI)”.

This labour test is a fairly clear bright-line test; you must work over 20 hours per week for at least five previous years or you get into a subjective reasonability test that will likely result in most amounts being in excess of reasonability.

The CRA provided some guidance in the materials stating that records such as timesheets, schedules and logbooks will be sufficient to confirm the hours a person worked.

Reasonable Return on Capital Test

There are two tests within this exclusion:

1. Safe Harbour Test

2. Reasonable return test

Safe Harbour Test

Where an individual 18-24 years of age has contributed capital, and does not qualify for the excluded share or excluded business exclusions, they may still qualify for a “safe harbor exemption” (No that does not mean you take your money and hide it in a safe harbor in the Turks and Caicos).

It means that you will be provided an exclusion from TOSI income to the extent of your capital contribution x a prescribed rate (currently only 1%). i.e. If you contribute $100,000, you multiply the $100,000 x 1%=$1,000 and you can exclude $1,000. To be a blunt bean counter, this exclusion is pretty much useless, since a) The reality is that in probably 95% of the cases, most shareholders only contribute $100 or less to purchase their shares and b) as noted above, the low prescribed rate means even if you did contribute a fair bit of capital, such as $100k, your exclusion is still a meager $1,000.

Reasonable Return Test

For those 25 years of age and older, this very subjective test says that a reasonableness test is to be applied to such factors as:

  • Work performed 
  • Risks assumed by the individual in the business 
  • Any other factors that may be relevant

Your guess is as good as mine as to how this would be applied. Consider Mr. A who is a shareholder and works full time in his business. His daughter also a shareholder, is a computer science student who comes up with a software application that leads to over one million dollars in new revenue for the business. What is her "reasonable" entitlement to dividends?

Retirement and Inheritance

The initial drafting of the proposals appeared to have inadvertently caused the TOSI rules to apply to retired private corporation owners and Canadians who had inherited private corporation shares. The new proposals have addressed these concerns.

The new TOSI rules provide the following exemptions:

1. Where an active owner-manager (someone who met the labour contribution rules) reaches age 65, the TOSI rules will not apply to their spouse (no matter their age). Note: these rules do not mean you can split your dividends like you do your pension income. They only allow you to pay dividends to your spouse who is not excluded by any of the provisions and avoid the TOSI rules where you are 65 or over.

2. If you are over 18 and inherit shares in a private corporation from someone who met the TOSI one of the TOSI exclusions, those shares will continue to be excluded.


The new rules do not apply to salary. However, there has always been a reasonableness test for salaries paid to family members vis a vie what would you pay an arm’s length persons and that rule will still apply.

Prescribed loans

The new rules do not appear to prevent the use of prescribed loans where you purchase public securities. See this blog and speak to your advisor about whether this strategy would be advisable for your situation.

At this time, I am not entirely comfortable answering questions on these proposals, until we have further clarity. So, if you ask a question or provide a comment on this post, I may not answer the question or will couch the answer. So please don’t expect definitive answers if you ask a question.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.


  1. Hi Mark,
    Am I correct that these rules will call for a more detailed analysis on the decision to use section 85 with a family business. In the situation I'm thinking of, the preferred shares could be redeemed fairly quickly to meet the share ownership test conditions, but the payment would then be taxed as a dividend, instead of a capital gain. Timing will play a big role in this decision, and I can picture common situations where it may be advisable to pay the tax on the gain instead of using section 85.

    Just wondering if you feel the same way or if i'm missing something.


    1. Hi Derick

      This was a complicated issue before the TOSI rules, so they only have added another consideration when tax planning. Issuing pref shares or freezing always required you to consider whether you should crystalize, whether the shares qualified as QSBC shares, whether the shares would be redeemed in the near term and how they would be taxed upon death as a deemed dividend or possibly whether a pipeline would be applicable to lower the final tax rate. So a complicated issue, was made just slightly more complex.

  2. What's frustrating me (at this moment, anyway) is that in all their Q&As and examples and such, there is effectively no information on multiple related companies, except the line that says shares do not count as excluded unless the business derives substantially all its income not from another related business.

    So that would seem to mean, if two spouses, over 25, co-own a holdco, which in turn owns an optco, their dividends from the holdco would not be excluded (at least not due to excluded shares), whereas if they owned the optco directly (assuming not a service business), they would be. As it's being described, this one-liner to prevent passing service business income through a shell corp to gain the exclusion seems to be unintentionally hammering many completely unrelated structures.

    The whole thing is just a cluster---- though.. I'm totally with you that it would have made far more sense to just let couples file jointly; boom, fair for everyone, without all of these complexity. Then make it revenue neutral, or even positive if you want, by reducing the small business deduction (instead they're doing the opposite), and/or increasing the rates in the higher individual tax brackets.

    As it is, they're adding a ton of complexity, for (as they're keen to point out) relatively little actual revenue, once everyone is done restructuring to take advantage of the exclusions. I would say it's good for the accountants and lawyers at least, except most of you are going to be hit by the changes too... :P

    1. Hi Nathan

      Yes the related/holding co issue will need to be clarified. I think your comments speak for most Small Biz owners.

  3. Hi Mark,

    I'm interested in knowing what your insights are for corporations going through a transition from active service businesses to just holding passive investments this year.

    For the excluded shares test, my understanding is that they look at whether the excluded shares met the condition as of the latest fiscal year of the corporation. If a corp has a fiscal year end of August 31, then is it correct that the excluded shares criteria look at the 2017-2018 FY for dividends paid in 2018?

    Follow up, if a corp had >90% of income from provision of services in its 2016-2017 FY, but had <90% of income from provision of services in 2017-2018 FY (i.e. just interest income), must the corp wait until after corporate year end in 2018 before paying dividends on excluded shares, or is it possible to pay dividends in January 2018 on excluded shares in this case?


    1. Hi Anon

      Sorry as I said in my blog, these are the type of questions I will not answer until we have greater clarity. FWIW, my understanding is that since you have until the end of 2018 to get your affairs in order, that they would look at your structure at dec 31, 2018 for any 2018 dividend

  4. So if your a small business owner with an opco, but you set up a holding company with your spouse to own the opco, your excluded? Even if opco sells products and is not a services corp? That is crazy

    1. Never said that, how a Holdco is affected is still not clear to many people.

  5. Hi Mark,

    Regarding the Excluded Shares- The share ownership test example you explain above, please confirm my understanding of the following:
    1) Does not apply to dividends declared prior to Jan 1, 2018.
    2) If a spouse owns more than 10% of the shares they have to be voting shares if they are deemed Excluded shares. Does this apply to passive income as well if the corp has only passive income in 2018?
    3) If a spouse has non-voting shares and you would like to convert to voting shares does a filing need to be done with the province where the corp is incorporated? Or is a resolution from a director of the corp sufficient.


    1. 1. correct, 2017 dividends are not caught
      2. waiting for budget to comment on passive issues
      3. not so simple, there may be valuation issues, you will need to speak to your accountant and probably lawyer to navigate the tax and legal issues

  6. Hi Mark, great insight. If I work more than 20 hours per week but decide to take dividends instead of salary, does that mean I meet the labour test? Thank you!

    1. That is my understanding if you met the test for the 5 year criteria

  7. Hi Mark,

    Regarding your response above '2017 dividends are not caught'. Does this apply if dividends are declared in 2017 & T5 is issued for 2017 for a Corporation with a non-calendar year end? i.e. June 2018.

    1. My understanding is 2017 t5 dividends are still under the old rules

  8. Hi Mark,

    Do you know whether the 2018 changes you describe above on split income will require additional reporting on the T2 Corporate return or will it be captured on the 2018 T1206 form filed with T1 return.

    Thank you

    1. Hi Anon

      Not sure, but I would guess it would be the T1, not the T2.

  9. Suppose the Opco is a services business/doctor and also owns a number of rental properties. Would the rental income be subject to TOSI? What do they mean by compound income is excluded

    1. Hi Raj,

      I am not answering your question since until the Liberals present their budget on the passive rules I am not sure of the interplay between TOSI and passive. Compound income is the income earned on TOSI income

  10. Hi Mark,

    Can you provide any more insights into the interplay of TOSI and passive income rules? Again the example is a Prof. Corp that own a number of passive investments in a related Holdco. Holdco receives "substantially all" of its income from 3rd party/passive sources. Can the investment income in Holdco be paid out to parents/spouse etc w/o TOSI applying? Would Holdco shares be "excluded shares"?

    1. Hi Raj

      I dont think there is that much interplay. The TOSI rules to me are pretty much a separate set of rules.

      I am still not answering these type TOSI questions as to many people still feel the answer to your question is still unclear. Sorry but ask your accountant.