Income Splitting Rules in Canada: A Clear Guide

Once a popular tactic among high-income earners and entrepreneurs, income splitting in Canada has undergone significant reform. With the expanded Tax on Split Income (TOSI) regime now in effect, many long-standing strategies have been curtailed but not all.

For business owners and families navigating today’s complex tax landscape, income splitting is still a viable tool when guided by experienced tax professionals. The key lies in understanding what still works, who qualifies, and how to implement strategies in full compliance with Canada Revenue Agency (CRA) expectations.

Let’s break down what’s changed and how you can still optimise your tax planning in 2025.

Income Splitting: The Basics

Income splitting is a legal tax planning strategy that shifts income from a high-income individual to a lower-income family member to reduce the overall household tax burden. Canada’s progressive tax system means that spreading income across lower brackets can significantly minimise taxes if done right.

Historically, income splitting was particularly advantageous for small business owners using private corporations. However, the updated TOSI framework, introduced in 2018 and expanded in 2019, imposed new rules that now impact a wider group including adults 18+.

 What TOSI Changed for Families and Small Business Owners

Under the revised regime, income such as dividends from a family-owned business is subject to TOSI unless the recipient meets specific exemption criteria. If they don’t, that income is taxed at the highest marginal rate, effectively erasing the tax benefit of income splitting.

What was once a relatively simple process now requires a strategic approach backed by documentation, due diligence, and guidance from experienced tax professionals.

 TOSI Exemptions: Where Income Splitting Still Works

While TOSI has narrowed the field, several exemptions remain for those who meet the criteria:

1. Excluded Business – Ages 18–24

If a family member aged 18–24 worked an average of 20+ hours per week in the business during the current year or any five previous years, their income may be exempt.

2. Excluded Shares – Age 25+

For those aged 25 or older, income from shares may be exempt if they own at least 10% of the votes and value of the business. Note: This doesn’t apply to professional corporations (law, accounting, dental, etc.) or businesses earning primarily service income.

3. Other Exemptions

  • Business Owners 65+: Can often split business income with their spouse.

  • Capital Gains: Sale of qualified small business shares or family farms may qualify for exemption from TOSI.

 Proven Income Splitting Strategies That Still Deliver

Even in a post-TOSI environment, there are still legitimate income splitting strategies that work when properly structured:

Spousal Loans

One of the most effective remaining strategies, spousal loans allow a high-income spouse to lend funds to their lower-income spouse at the CRA’s prescribed interest rate. The income generated from investing these funds is then taxed in the hands of the lower-income spouse, offering notable tax savingsif interest is paid by January 30 each year.

Family Trusts

Still valuable for families with complex structures or multiple beneficiaries, trusts allow income to be distributed and taxed at lower marginal rates. However, navigating the compliance requirements demands careful planning.

Both of these methods must be implemented with professional oversight to avoid penalties and CRA reassessments. Now more than ever, consulting  offshore tax professional can be the difference between success and non-compliance.

 How Income Splitting Fits into Modern Tax Planning

Canada’s personal tax rates remain among the highest in the developed world. That means proactive tax planning isn’t just smart it’s essential.

Income splitting continues to play a role, particularly for family-run businesses or households managing investment income. But the rules are no longer forgiving. Compliance now requires:

  • Accurate records of contributions

  • Meeting exemption criteria

  • Strategic use of corporate structures

  • Ongoing monitoring of TOSI developments

This isn’t the time for guesswork. If you’re unsure whether your current structure complies with TOSI, now is the time to act.

 Final Word: Strategy Over Assumption

Too many business owners assume income splitting is no longer worth the effort. But that assumption could be costing you thousands. With expert support and the right structure, you can still reduce your family’s tax burden without crossing compliance lines.

If you're asking, “Who is eligible for income splitting in Canada?” the answer depends on your business model, documentation, and proactive strategy.

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