Paying family from a veterinary corporation: what TOSI allows
Key takeaways
- The “excluded shares” exception to the tax on split income is not available to a veterinary professional corporation.
- Splitting income with family without triggering TOSI relies on the 20-hour rule, the reasonable-return test, or the age-65 exception, which depends on the veterinarian’s age, not the family member’s.
- Paying a dividend to a family member who does little or no work for the practice almost always results in TOSI rates being applied.
- Salary paid to family for genuine work avoids TOSI but creates payroll costs and source deductions.
Why excluded shares do not apply
The TOSI rules, short for tax on split income, tax certain payments to family at the top marginal rate. One of the main exceptions, the excluded-shares exception, requires that the shares meet specific criteria including that the corporation is not a professional corporation. Because a veterinary practice is a professional corporation under the Income Tax Act, excluded shares are not available.
That means the typical income-splitting route used by a commercial business, put your spouse on as a shareholder and pay them dividends, does not work for a veterinarian the same way.
The three routes that do work
| Route | How it works | Best for |
|---|---|---|
| Excluded business | Family member works avg 20 hours/week in the practice | Spouse working in the clinic |
| Reasonable return | Dividend is a fair return on what the family member put in. Work counts only at 25 or older | Family who invest capital, or who are 25 or older and contribute some time |
| Age 65+ | Once the veterinarian turns 65, dividends to their spouse can be exempt, if they would be exempt for the veterinarian | Spouse of a veterinarian aged 65 or older |
The 20-hour rule in practice
The excluded-business exception applies when a family member works an average of 20 hours per week in the practice during the year. This is not a hard count of every week, it is the average across the year. A spouse who works 20 hours a week in the clinic, handling reception, billing, or inventory, would meet the threshold.
Below 20 hours, the family member is not automatically out. They can still qualify if their involvement is regular, continuous and substantial on the facts, or if they met the test in any five earlier years. If not, the reasonable-return test is the next route. For someone 25 or older, that can include their work, property or risk. For someone 18 to 24, only money or property they contributed counts.
What happens if you do not meet an exception
If TOSI applies, the dividend paid to the family member is taxed at the top marginal rate, regardless of the family member’s actual income. A dividend paid to a spouse with no other income would normally be taxed at low rates. Under TOSI, that same dividend is taxed at the top personal rate instead. The dividend tax credit still applies, but the bill is far higher than the family expected.
Why this matters: the TOSI rules turn a routine family dividend into a high-tax event. A veterinary corporation that pays dividends to family without checking the exceptions is at risk of reassessment and penalties.
Salary vs dividend for family members
Salary avoids TOSI because salary is not split income. If your spouse genuinely works in the practice, paying a salary is simpler and safer than trying to fit a dividend through one of the TOSI exceptions. The trade-off is that salary triggers CPP contributions, EI if applicable, and source deductions.
Dividends come from after-tax corporate income and do not create RRSP room for the recipient. Salary creates RRSP room. For a family member who will eventually need retirement savings, salary may be the better choice even with the payroll costs.
Frequently asked questions
Can my spouse be a non-voting shareholder in my veterinary corporation?
Yes, depending on the province’s College rules. In BC, non-veterinarian family can hold shares. In Alberta, the vet must hold at least 51 percent voting but family may hold the rest. In Ontario, all shareholders must be licensed veterinarians.
Does paying salary avoid TOSI entirely?
Yes. TOSI applies to dividends and certain trust payments, not to salary or wages. Salary paid to a family member for genuine work is always exempt from TOSI.
How many hours does a family member need to work?
An average of 20 hours per week, during the part of the year the business operates, is treated as meeting the excluded-business exception from TOSI. Meeting it in any five earlier years also counts. Below 20 hours, a family member can still qualify if their involvement is regular, continuous and substantial on the facts. If not, check the reasonable-return test.
What is a reasonable return?
A reasonable return is a dividend that matches a fair return on what the family member put into the practice. For someone 25 or older, that can include their work, property or risk, and it depends on the facts. For someone 18 to 24, only money or property they contributed counts, and the return allowed on it is limited.
Is the age-65 exception automatic?
No. It depends on the veterinarian’s age, not the family member’s. Once the veterinarian turns 65, dividends paid to their spouse can be exempt from TOSI, but only if the dividend would have been exempt if the veterinarian had received it. A shareholder reaching 65 does not exempt them on its own.
Talk to us about your income-splitting plan at ghumans.ca/veterinary.
General information only. Talk to us about your situation.