Find out if you can pay dividends to family members from your CCPC without triggering Tax on Split Income, and know exactly what to document to defend it.
Why this matters
The real question is: who receives the dividends from your CCPC? If you take them yourself at the top marginal rate, you could pay 39-47% in personal tax depending on your province. If a family member in a lower bracket receives the same $100,000 dividend with no TOSI issue, they may pay as little as 7%. That is a difference of up to $40,000 on a single dividend payment, legally, by getting the structure right.
The five-year rule: if a family member works 20+ hours per week in your business for any five years (not necessarily consecutive), that exemption is permanent for life. Even after they stop working, dividends paid to them are TOSI-free forever. The earlier you start the clock, the more valuable the outcome.
Planning suggestions when offside
Documentation checklists
Scope: This tool covers dividends from a Canadian-controlled private corporation (CCPC) paid to a family member. This applies to roughly 85% of TOSI situations Canadian business owners face.
DisclaimerThis tool provides general information only and does not constitute tax or legal advice. Every situation is fact-specific. Consult a qualified CPA before making any dividend payments to family members. Zenbooks Tax Services Professional Corporation is regulated by CPA Ontario.
Step 1 of 70%
Your situation so far
Step 1 of 7 - The Recipient
Who is receiving the dividend from your CCPC?
Select one. TOSI applies when income flows to certain family members connected to your business. The relationship determines which exemption paths are available - and some relationships are completely outside TOSI's reach.
Great news if this is your situation. Aunts, uncles, nieces, nephews, and cousins fall outside the definition of "related individual" under TOSI. You can pay dividends to them from your CCPC and they are taxed at their own marginal rate - potentially saving tens of thousands of dollars compared to a TOSI-taxed dividend. No active engagement test, no share ownership requirements. This is one of the cleanest tax planning opportunities available.
Step 2 of 7 - Your Age as Business Owner
How old are you (the CCPC owner) at December 31 of the tax year?
A special rule applies once you reach 65. It mirrors pension income splitting and can allow spousal dividends without any of the engagement or share ownership tests.
When you (the source individual) have reached age 65 and have made a sufficient contribution to the business to qualify for any TOSI exclusion yourself, dividends paid to your spouse are automatically exempt from TOSI - regardless of whether your spouse works in the business or how many shares they hold. This mirrors how pension income splitting works.
Step 2 of 7 - Recipient's Age
How old is the dividend recipient at December 31 of this tax year?
Age at year-end is one of the most important factors in TOSI. If you have multiple children, think of this as applying to each one individually - the rules and opportunities differ significantly across age brackets.
If you have multiple children in different age brackets: run this screener once for each child. A 27-year-old and a 22-year-old who both work in your business have very different TOSI profiles and planning considerations.
Step 3 of 7 - Active Engagement Test
How involved is this family member in your business?
This is the most accessible and defensible exemption for any family member 18 or older. Before you answer - consider carefully. Many business owners underestimate how much their spouse actually contributes: after-hours financial conversations, HR decisions, client consultations, administrative work, and being a constant sounding board for business strategy. That involvement is real work. It may be more than 20 hours a week.
The CRA's bright-line safe harbour is 20 hours per week on average during the operating season. Work includes: managing staff or operations, doing bookkeeping or administration, handling client relationships, making purchasing decisions, managing finances, social media and marketing, driving for the business, and strategic planning. It also includes the kind of work that happens outside business hours: answering calls, making decisions, advising the owner on business matters. If your spouse is genuinely your business partner in any meaningful sense, document all of it. The five prior years rule means that once they hit 20 hours/week for any five tax years (non-consecutive), the exemption is permanent for life - even if they stop working entirely.
Under 20 hours does not automatically mean offside. The 20-hour rule is a safe harbour, not the only route. If the business is small or does not require 20 hours from any single person, and this family member contributes a meaningful, regular share of the total work - that can still qualify as "regular, continuous and substantial." Qualitative factors matter: Do they make decisions? Do they manage operations or staff? Do they advise on financial or HR matters? The stronger the answer to these questions, the more defensible the position. Start documenting everything now: a written role description, calendar entries, emails showing business decisions, records of responsibilities held.
Step 4 of 7 - Share Ownership
Does this family member own shares directly in their own name?
The excluded shares test requires personal direct ownership. Shares held through a family trust do not qualify for this specific test - even if the person is a named beneficiary.
CRA has confirmed that trust beneficiaries cannot use the excluded shares exemption because the trust, not the individual, legally owns the shares. Direct personal registration in the share register is required. A corporate reorganization to roll shares out of a trust to individual beneficiaries can unlock this path for qualifying family members.
Shares through a trust block the excluded shares exemption. The active engagement test and reasonable return test (for 25+) are still available. If reorganizing to transfer shares directly to the beneficiary makes sense for your situation, that can open up this exemption path going forward. This is worth discussing with your CPA.
Step 5 of 7 - Share Threshold
Does this family member hold at least 10% of the total votes AND 10% of the total fair market value of all shares in the corporation?
Both tests must be met simultaneously. Shares from different classes can be combined. The key trap: non-voting shares (common in income-splitting structures) may satisfy the value test but fail the vote test.
Votes: divide this person's voting shares by total voting shares outstanding. If 100 of 1,000 voting shares, that is 10%. Value: divide the fair market value of their shares by total fair market value of all shares. If their shares are worth $100,000 of a $1,000,000 total, that is 10%. Both must be at or above 10% simultaneously.
Both thresholds must be met. If shares are non-voting, the excluded shares test fails regardless of value held. Converting shares to carry voting rights, or issuing additional voting shares, can address this - but requires careful planning to avoid other tax issues. Your CPA can review whether restructuring is worthwhile.
Step 6 of 7 - Business Income Test
What percentage of your corporation's gross revenue comes from providing services versus selling goods or other non-service income?
Measured on gross revenue (before expenses) from the most recently completed tax year. This test catches most professional and consulting businesses. If you bill for both labour and materials separately, the materials component is non-service revenue.
Service income: consulting fees, management fees, professional billings (medical, dental, legal, accounting, engineering), IT services, marketing services, labour billed to clients. Non-service income: sale of goods or physical products, materials billed separately from labour, software licences, property income. For construction and trades that bill for materials and labour on the same invoice, CRA has confirmed the materials component is non-service income if it can be separately identified.
Step 7 of 7 - Reasonable Return Assessment
Since the other exemptions may not apply cleanly, has this family member made genuine contributions to the business?
For family members 25 or older, a dividend can be TOSI-exempt if it represents a reasonable return on their actual contributions - including capital invested, risks assumed (such as personal guarantees), property contributed, and work performed.
Clear - No TOSI
Dividends to extended family are fully tax-advantaged
TOSI does not apply. This dividend is taxed at the recipient's own marginal rate - potentially saving you tens of thousands of dollars compared to a TOSI-taxed payment.
Why this is a clean result
TOSI only applies to income from a "related business" - which requires a direct family member (spouse, parent, child, sibling) to be involved in the business. Extended family members such as aunts, uncles, nieces, nephews, and cousins fall outside this definition under subsection 120.4(1) of the Income Tax Act.
This means you can pay dividends to nieces, nephews, aunts, uncles, and cousins without TOSI applying. There are no active engagement tests, no share ownership requirements, no services income thresholds. The dividend is simply taxed in the recipient's hands at their own marginal rate.
One thing to confirm
While TOSI does not apply, ensure the dividend-paying shares were acquired at fair market value and that no corporate attribution rules (ITA s.74.4) are triggered by your share structure. Ask your CPA to do a quick review of the share issuance to confirm the clean result holds.
Want to confirm this result holds?
A quick structure review ensures no other attribution rules are triggered before you pay.
Important disclaimer This tool provides general information only and does not constitute tax or legal advice. TOSI rules are highly fact-specific. Consult a qualified CPA before making any dividend payments. Zenbooks Tax Services Professional Corporation is regulated by CPA Ontario.
Not Recommended - Under 18
Dividends to minors are not a viable planning tool
TOSI applies almost universally to dividends paid from a family-owned CCPC to a child under 18. The solution is to not pay dividends until they are older - and start planning now for when they reach adulthood.
Why dividends to minors do not work
For individuals under 18 at year-end, the original "kiddie tax" rules apply automatically. Adults cannot use the active engagement test, excluded shares test, or reasonable return test on behalf of minors. The exclusions that exist for minors (inherited property, non-related business) almost never apply in a standard family CCPC context.
The practical answer for most families: simply do not issue dividends to minor shareholders. Keep the shareholding structure in place for future planning, but do not pay dividends until the child reaches adulthood.
How to plan ahead - the picture changes completely at 18
Pay reasonable employment income for work actually performed
TOSI does not apply to salaries or wages. If a child genuinely works in the business (office work, delivery, administration, customer service), paying a reasonable wage for actual hours is completely outside TOSI. Document the role, hours, and a comparable market wage for the work performed.
Start the five-year active engagement clock at age 18
The moment a child turns 18, the excluded business exemption becomes available. If they work 20+ hours per week in the business for any five tax years from that point forward (non-consecutive), the exemption is permanent for life. Getting them involved in the business from age 18 is one of the most valuable long-term tax planning moves a family business owner can make. The earlier they start, the sooner the permanent lifetime exemption kicks in.
Review the shareholding structure for 18-to-24 planning
Once they turn 18, limited options open up immediately. By 25, the excluded shares test becomes available. Use the years between now and then to get the share structure right so the transition to adulthood activates the most advantageous exemptions automatically.
Plan now for when they turn 18
The decisions made today about shareholding structure and business involvement will determine how much you can save in the years ahead.
Important disclaimer This tool provides general information only and does not constitute tax or legal advice. TOSI rules are highly fact-specific. Consult a qualified CPA before making any dividend payments. Zenbooks Tax Services Professional Corporation is regulated by CPA Ontario.
Clear - Age 65+ Rule
Spousal dividends are tax-advantaged - no further tests needed
Because you have reached age 65 and contributed meaningfully to your business, dividends paid to your spouse are exempt from TOSI regardless of their involvement or share structure.
How the age 65+ rule works
When the source individual (you, the owner-operator) has attained age 65 by December 31, and you qualify for any TOSI exclusion yourself, dividends paid to your spouse are automatically exempt - regardless of your spouse's age, whether they work in the business, or how many shares they hold. This aligns with existing pension income splitting rules.
Your spouse does not need to meet the 20-hour active engagement test. They do not need to hold 10% of votes and value. The age 65+ rule bypasses all of those requirements.
What to document
Your date of birth confirming you reached age 65 in or before the tax year
Your own qualification for any TOSI exclusion (e.g., your career-long active engagement in the business)
Your spouse's Canadian residency at year-end
Board resolution authorizing the dividend
T5 slip reporting the dividend in your spouse's hands
You are in a great position - let's optimize further
At 65+, retirement income planning, salary vs. dividend mix, and succession strategy all intersect. Let's review the full picture.
Important disclaimer This tool provides general information only and does not constitute tax or legal advice. Consult a qualified CPA before making any dividend payments. Zenbooks Tax Services Professional Corporation is regulated by CPA Ontario.
Clear - Excluded Business
TOSI should not apply - active engagement exemption available
This family member's involvement qualifies for the excluded business exemption. Here is what you need to document to defend this position.
Why this qualifies
Under the excluded business exemption (ITA s.120.4(1)), TOSI does not apply to dividends paid to a family member who is actively engaged on a regular, continuous and substantial basis in the business - in the current year or in any five prior tax years (non-consecutive).
Once they have met this standard in any five years, the exemption applies permanently for life - even if they later reduce hours, change roles, or retire from operations entirely.
Lifetime exemption confirmed
Since this family member has already met the 20-hour threshold in five or more prior years, the exemption is permanent. Dividends paid to them now and in the future are excluded from TOSI indefinitely - even if they never work in the business again. The five years do not need to be consecutive.
You will want to be able to demonstrate this history if CRA asks. Pull together payroll records, T4 slips, timesheets, or any contemporaneous records from those historical years showing the involvement.
Under 20 hours - defensible but documentation is critical
Since this family member does not clearly meet the 20-hour bright-line safe harbour, the position rests on the broader "regular, continuous and substantial" facts-and-circumstances test. This is defensible where the business does not require 20 hours from any single person and this family member contributes a meaningful share of the total work.
CRA will look at qualitative factors: Do they make decisions? Do they manage operations, staff, or clients? Do they have signing authority? Do they advise the owner on business matters outside of business hours? Document the substance, not just the hours. Start contemporaneous records immediately - reconstructed records after the fact carry far less weight.
Documentation checklist - what to keep
Timesheets or weekly activity logs - ideally created at the time, not reconstructed afterward
T4 slips and payroll records confirming employment income and source deductions if they receive a salary
Written role description covering responsibilities, decisions made, and operational authority
Evidence of regular business activities: emails, calendar entries, client correspondence, supplier communications, meeting records
Shareholder or employment agreement confirming their role in the business
If relying on five prior years: T4s and any payroll or activity records from those historical years showing 20+ hours
This looks good - let's make it bulletproof
We help business owners structure dividend payments that hold up under audit. Let's review your documentation and confirm the position is airtight.
Important disclaimer This tool provides general information only and does not constitute tax or legal advice. TOSI rules are highly fact-specific. Consult a qualified CPA before making any dividend payments. Zenbooks Tax Services Professional Corporation is regulated by CPA Ontario.
Clear - Excluded Shares
TOSI should not apply - excluded shares exemption available
All four conditions for the excluded shares test appear to be met. No active engagement is required. Confirm these conditions annually and document as shown below.
Conditions met
Recipient is 25 or older at December 31
Shares held directly in their own name
Holds 10% or more of votes AND 10% or more of fair market value
Less than 90% of gross business income from services
Not a professional corporation
This means any dividend income or capital gain from disposing of these shares is an excluded amount. No TOSI applies. No limit on dividend size. The family member does not need to work in the business.
Watch the related business income test - verify annually
There is a fourth condition that must be confirmed each year: substantially all of the corporation's income must not be derived from another related business. This means if more than 10% of the corporation's income comes from another business in which a family member is involved, the excluded shares test may fail for that year.
This is most relevant for holding companies receiving dividends from an operating subsidiary. CRA has confirmed that holding company shares are generally difficult to qualify as excluded shares where the income is primarily dividends from a related operating company.
Annual verification checklist
Share register confirming direct ownership at 10%+ votes and value - review at each year-end
Corporate income breakdown confirming less than 90% of gross revenue is from services - check each fiscal year
Confirmation the corporation remains outside the professional corporation definition
Review whether any related business income has entered the corporation via dividends, management fees, or other sources
Board resolution authorizing the dividend payment
Great structure - let's keep it that way year after year
The excluded shares exemption needs annual verification. We can review your corporate structure and revenue mix at year-end to confirm it still qualifies.
Important disclaimer This tool provides general information only and does not constitute tax or legal advice. TOSI rules are highly fact-specific. Consult a qualified CPA before making any dividend payments. Zenbooks Tax Services Professional Corporation is regulated by CPA Ontario.
Possible - Reasonable Return
A reasonable return argument may be available - professional review needed before you pay
This is the most subjective TOSI exemption. Whether it holds depends on the specific numbers and contributions. A CPA needs to review the facts before dividends are paid.
How this test works
For family members aged 25 or older, dividends that represent a reasonable return on actual contributions are excluded from TOSI. CRA considers: work performed, property contributed, risks assumed (including personal guarantees), and historical payments made for those contributions.
CRA provides no bright-line on what is "reasonable." This test is the most likely to attract scrutiny on audit. The stronger the contribution story, the more defensible the position. Getting the amount right before payment is made is essential - it is much harder to justify after the fact.
Capital contributions create a mechanical safe harbour
Because this family member has contributed capital (cash, loans, or personal guarantees), there is a clearer basis for the safe harbour capital return - calculated as their contributed capital multiplied by the CRA's prescribed rate (currently around 3%). This is mechanical and defensible.
For example, at a 3% prescribed rate, $200,000 of contributed capital supports $6,000 per year in TOSI-free dividends with no further analysis. Amounts above the safe harbour require the broader reasonable return analysis based on all contributions made.
How to build the strongest position before paying
Document every contribution in writing before payment
Create a written record of all capital contributed (loans, share subscriptions, property transferred), all guarantees signed (with copies of the guarantee documents), all work performed (role, responsibilities, strategic contributions), and any risks personally assumed in connection with the business. This record needs to exist before the dividend is declared.
Tie the dividend amount to the contribution level
The more clearly you can demonstrate that the dividend amount is proportional to the contributions made, the stronger the argument. A CPA can help you calculate a defensible amount before payment. Do not estimate after the fact.
Consider paying salary for the work component
If this family member does any meaningful work in the business, paying them reasonable employment income for that work is fully exempt from TOSI with no reasonableness analysis beyond ensuring the wage is commercially appropriate. This can reduce the dividend amount that needs to be justified under the reasonable return test.
This needs a CPA's review before you pay
The reasonable return test has no bright lines. Getting the structure and amount right in advance is the only safe approach.
Important disclaimer This tool provides general information only and does not constitute tax or legal advice. TOSI rules are highly fact-specific. Consult a qualified CPA before making any dividend payments. Zenbooks Tax Services Professional Corporation is regulated by CPA Ontario.
Not Currently Available
No clean exemption under your current structure - do not pay dividends yet
Under your current structure, paying dividends would trigger TOSI and eliminate any tax advantage. The right move is to not issue them - and to fix the structure first. Here is exactly what needs to change.
What is blocking the exemptions
Planning strategies to get onside
Your structure needs work - but the fix is achievable
The planning strategies above are all legitimate and achievable. Our team specializes in restructuring family business shareholdings to maximize dividend flexibility within the rules.
Important disclaimer This tool provides general information only and does not constitute tax or legal advice. TOSI rules are highly fact-specific. Consult a qualified CPA before making any dividend payments. Zenbooks Tax Services Professional Corporation is regulated by CPA Ontario.