Income Splitting Within a Professional Corporation: What’s Actually Allowed

Income splitting used to be one of the simplest tax advantages of incorporating a practice — pay dividends to a lower-income spouse, and the family keeps more after tax. The federal Tax on Split Income (TOSI) rules narrowed that considerably starting in 2018. Here’s what’s actually still allowed, and where physicians and dentists most often get this wrong.

What TOSI actually changed

Before 2018, a professional corporation could generally pay dividends to a spouse or adult children as shareholders with relatively little scrutiny of whether they were actively involved in the business. TOSI applies a higher, top-marginal tax rate to dividends paid to family members who don’t meet certain exemption tests — effectively removing the benefit of splitting income with a family member who isn’t genuinely contributing to the practice.

Who can still receive dividends without triggering TOSI

The TOSI rules include specific exemptions, and a family member may still receive dividends without the higher tax rate if they fall into one of a few categories: they are meaningfully and actively involved in the business on a regular, continuous, and substantial basis (generally interpreted as an average of 20 or more hours per week during the year, or in prior years); they own “excluded shares” representing a meaningful percentage of votes and value in a corporation that isn’t a professional services business in some cases; or they are the spouse of a business owner who is 65 or older, in which case income splitting rules generally revert closer to the pre-2018 approach. Each of these exemptions has specific conditions attached, and whether a given situation qualifies is a determination worth making with your accountant before dividends are paid, not after.

Income-splitting strategies that still work

• Paying a spouse or family member a reasonable salary for actual work they perform in the practice — the key word being reasonable and actual, matched to a real role and market-rate pay.
• Spousal RRSP contributions, which can shift future retirement income toward a lower-income spouse even though the contribution itself doesn’t move current-year income.
• Prescribed rate loans to a spouse or an adult child (or to a family trust) at the CRA’s prescribed interest rate, allowing investment income earned on the loaned funds to be taxed in the hands of the lower-income family member, provided the interest is actually paid annually.
• Pension income splitting in retirement, which operates under different rules than TOSI and can still meaningfully reduce a couple’s combined tax bill once retirement income begins.

Where professionals get this wrong

The most common mistake is assuming a spouse can simply be added as a shareholder and paid dividends without meeting one of the exemption tests above — a leftover assumption from before 2018 that can trigger an unwelcome tax bill and CRA scrutiny if the dividends don’t actually qualify for an exemption. The second most common mistake is treating a family member’s job title as sufficient proof of “active involvement” without the hours or duties to back it up. Documentation matters here: tracking actual hours worked and duties performed is worth doing before dividends are paid, not reconstructed afterward if questioned.

Where this fits into your broader plan

Income splitting is one piece of a broader corporate structure decision that also touches how you’re paid personally (see our article on salary vs. dividends), whether a holding company makes sense for your situation, and how retained earnings are managed inside the corporation over time. These pieces generally work best when planned together rather than in isolation.

If you’d like help figuring out what’s actually allowed for your specific family and corporate structure, a free, no-obligation consultation is a good place to start. Book a time here, or read more about financial planning for doctors and incorporated professionals and financial planning for dentists across Canada.

This article is for general educational purposes and does not constitute personalized tax or legal advice. Income splitting and TOSI rules are complex and fact-specific — consult a qualified accountant or tax professional about your particular situation before implementing any strategy.