TOSI rules apply the top marginal tax rate to certain income, mainly dividends, paid to family members who are not genuinely involved in the business, curbing income splitting.
Income splitting, paying dividends to lower-income family members to reduce overall tax, was sharply curtailed by the TOSI rules. When they apply, the income is taxed at the top marginal rate in the recipient's hands, erasing the splitting benefit.
Several exclusions keep legitimate arrangements out of TOSI: a spouse of an owner aged 65 or over, family members who work in the business an average of 20 or more hours a week, owners of "excluded shares" meeting ownership tests, and reasonable returns for capital or labour actually contributed. Documenting real involvement is essential.
A business owner pays $40,000 in dividends to an adult child who does no work in the company. Under TOSI, that dividend is taxed at the top marginal rate rather than the child's lower rate, removing the intended saving.
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