Canada Income Splitting Guide (TOSI, Attribution Rules)

the income splitting strategies and the restrictions in Canada. The Tax on the Split Income (TOSI) — the 2018 Federal Budget introduced the TOSI to restrict the "income sprinkling" (the payment of the dividends to the family members at the lower tax rates). The TOSI applies to the "split income" (the dividends and the capital gains from the private corporation shares) received by the "specified individual" (the individual who is the non-arm's length to the private corporation). The TOSI is calculated at the top marginal rate (33% federal + the provincial top rate). The "kiddie tax" — the TOSI for the minors under 18 — the dividends and the capital gains from the private corporation shares received by the minor are taxed at the top marginal rate (the "kiddie tax" — the "TOSI for the minors"). The attribution rules — the income or the capital gain from the transferred property is "attributed" (taxed back) to the transferor (the "spousal attribution" — s. 74.1 of the ITA) or the transferor's spouse (the "minor attribution" — s. 74.3 of the ITA). The prescribed rate loans — the taxpayer can lend the funds to the spouse or the family trust at the CRA's prescribed interest rate (the "prescribed rate" — 5% for the Q3 2025, historically 1% to 2%). The "prescribed rate loan" strategy shifts the investment income to the lower-income spouse (the interest income at the prescribed rate is taxed in the transferor's hands; the investment income above the interest is taxed in the spouse's hands). The family trusts — the "alter ego trust" or the "joint partner trust" for the income splitting with the spouse. The pension income splitting — the Form T1032 for the RRIF income splitting (the pension income can be split 50/50 with the spouse). The CPP sharing — the "CPP assignment" for the spouses 60+.

TOSI (Tax on the Split Income)

Specified individual: The individual who is the "non-arm's length" to the private corporation — the individual who is the "connected" (the shareholder, the family member of the shareholder). The TOSI applies to the "split income" (the dividends, the capital gains from the sale of the shares, the income from the partnership or the trust that is derived from the private corporation).
Exclusions: The TOSI does NOT apply to the "excluded amount" — the income that is the "reasonable return" on the capital contributed by the individual (the "capital contribution" exclusion), the income from the "active business" (the "labour contribution" — the individual works 20+ hours per week in the business), and the income from the "excluded shares" (the shares that represent the "significant economic interest").
Kiddie tax (under 18): The TOSI for the minors under 18 — the dividends and the capital gains from the private corporation shares are taxed at the top marginal rate (the "kiddie tax" — the "33% federal + the provincial rate"). The minor cannot use the "labour contribution" exclusion (the minor under 18 cannot work 20+ hours per week). The minor can use the "capital contribution" exclusion if the capital is inherited from the parent.

Attribution Rules

Spousal attribution (s. 74.1): The income and the capital gains from the property transferred to the spouse (or the common-law partner) are attributed to the transferor (the "spousal attribution" — the transferor pays the tax on the income earned by the spouse on the transferred property). The attribution can be avoided through the "prescribed rate loan" (the loan at the CRA's prescribed rate).
Minor attribution (s. 74.3): The income and the capital gains from the property transferred to the minor child (under 18) are attributed to the transferor (the "minor attribution" — the "kiddie tax" for the investment income from the transferred property). The minor attribution does NOT apply to the income from the Canada Child Benefits, the GST/HST credits, or the inheritances.
Corporate attribution: The income from the property transferred to the corporation is attributed to the transferor if the transferor is the "specified shareholder" (the 10%+ shareholder) and the purpose of the transfer is the income splitting (the "corporate attribution" — s. 74.4 of the ITA).

Prescribed Rate Loans

Strategy: The taxpayer lends the funds to the spouse (or the family trust) at the CRA's prescribed rate (the "prescribed rate loan"). The spouse invests the funds and earns the income. The interest income at the prescribed rate is taxed in the transferor's hands; the investment income above the interest is taxed in the spouse's hands.
Prescribed rate (2025): The CRA's prescribed rate for the Q3 2025 is 5% (the rate was 1% for the 2018-2022 years, 5% for the 2023-2025 years). The "prescribed rate loan" is most effective when the prescribed rate is low (the lower the prescribed rate, the less interest the transferor must pay).
Conditions: The interest must be paid by the spouse to the transferor by January 30 of the following year (the "interest payment deadline"). The loan must be documented (the "promissory note" — the principal, the interest rate, the payment terms). The interest must be paid at the prescribed rate (the "compounding interest" rule — the interest must be paid annually, not compounded).

For the family trusts and the estate planning, see our Estate Planning Guide →. For the pension income splitting and the CPP sharing, see our Pension Income Splitting Guide →.