Income splitting: a pharmacy vs a medical practice
Key takeaways
- A pharmacy is generally not a professional corporation for TOSI purposes the way a medical or dental practice is.
- That means the excluded-shares exception may be available for a pharmacy if less than 90 percent of its income comes from providing services.
- A medical practice earns nearly all its income from services, so excluded shares are not available.
- This difference gives a pharmacy potentially more income-splitting room than a doctor or dentist.
Why a pharmacy is different for TOSI
The tax on split income rules have an exception for excluded shares. To qualify as excluded shares, the corporation must not be a professional corporation under the Income Tax Act. A medical or dental practice is a professional corporation, so the exception is not available to them.
A pharmacy is a different story. Pharmacies earn income from dispensing services, product sales, and front-shop retail. Because a pharmacy is generally not on the tax law’s list of professional corporations, the excluded-shares analysis hinges on the 90-percent-services test, not on professional-corporation status.
The 90-percent test
The excluded-shares exception requires that less than 90 percent of the corporation’s income comes from providing services. If a pharmacy earns a meaningful share of its income from product sales and front-shop revenue, not only dispensing, it may fall under the 90-percent services line and keep the excluded-shares route open.
| Scenario | Services income | Product / retail income | Excluded shares possible? |
|---|---|---|---|
| Medical practice | 95%+ | Minimal | No |
| Dental practice | 95%+ | Minimal | No |
| Retail pharmacy | 40-70% | 30-60% | Maybe, depends on the mix |
Why this matters for income splitting
If the excluded-shares exception applies, a pharmacy can pay dividends to family members without triggering TOSI, as long as the shares meet the other criteria (holding period, related-party test). That means a pharmacist’s spouse or adult children could hold excluded shares and receive dividends taxed at their lower personal rates.
This is a meaningful difference from a medical or dental practice. A doctor cannot use excluded shares at all. A pharmacist may be able to, depending on their income mix.
It is fact-specific
The 90-percent test is not a rule of thumb. It is a precise calculation based on the corporation’s income for the year. If more than 90 percent of your pharmacy’s income comes from dispensing services and professional fees, the excluded-shares exception is not available.
If your pharmacy has meaningful product sales, compounding revenue, or front-shop retail that pushes the services income below 90 percent, the exception may apply. The question turns on your specific income mix and should be measured each year.
Why this matters: this is one of the few places where a pharmacy has more planning room than a doctor or dentist. But it is not automatic, it depends on real numbers. Measuring your dispensing-versus-retail mix is the first step.
Frequently asked questions
Is a pharmacy definitely not a professional corporation for TOSI?
Generally yes, but it depends on the specific facts. A pharmacy that only dispenses and does not sell products may be closer to a service business. The analysis is fact-specific.
What counts as services income for the 90-percent test?
Professional fees, dispensing fees, medication reviews, and similar revenue for services provided. Product sales and retail items are not services income.
Can I structure my pharmacy to have more product income for TOSI purposes?
You can, but business purpose matters. If CRA sees the structure as tax-motivated without a real business rationale, the general anti-avoidance rule could apply.
Does this apply to a hospital pharmacy differently?
A hospital pharmacy is typically not a separate business corporation. The analysis above applies to a privately owned retail or compounding pharmacy.
What if my pharmacy has both dispensing and retail under the same corporation?
That is the most common structure. The income mix of the single corporation is what matters for the 90-percent test.
Talk to us about your income-splitting options at ghumans.ca/pharmacies.
General information only. Talk to us about your situation.