Splitting income with family as a dentist: the TOSI rules
Key takeaways
- The excluded-shares exception to TOSI is not available to a dental professional corporation.
- Dividends paid to family who do not work in the practice are taxed at the top marginal rate unless another exception applies.
- Salary paid to family for genuine work avoids TOSI entirely.
- The three exceptions that survive for dentists are the 20-hour rule, reasonable return, and the age-65 rule, which depends on the dentist’s age, not the family member’s.
Why excluded shares do not help a dentist
The tax on split income rules have an important exception for excluded shares. To qualify as excluded shares, the corporation must not be a professional corporation. A dental corporation is a professional corporation under the Income Tax Act, so excluded shares are not available.
That means you cannot put your spouse or children on as shareholders and pay them dividends to split income, unless you meet one of the other TOSI exceptions.
The three exceptions that do work
| Exception | Requirement | Practical use |
|---|---|---|
| Excluded business | Family works avg 20 hrs/wk | Spouse works in reception or billing |
| Reasonable return | Dividend is a fair return on what the family member put in. Work counts only at 25 or older | Family member who invested capital, or who is 25 or older and does some work |
| Age 65 | Dentist is 65 or older, and the dividend would be exempt if the dentist received it | Spouse of a dentist aged 65 or older |
The 20-hour rule in a dental practice
If a family member works in the practice an average of 20 hours per week during the year, dividends they receive are exempt from TOSI under the excluded-business exception. This is the most reliable way to split income with a spouse who works in the clinic.
The work does not have to be clinical. Reception, billing, scheduling, bookkeeping, and practice management all count. What matters is the time commitment, not the title.
What happens if TOSI applies
When TOSI applies, the dividend paid to the family member is taxed at the top marginal rate regardless of their personal income. A dividend paid to a stay-at-home spouse with no other income would normally be taxed at low rates. Under TOSI, it 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 penalty for getting TOSI wrong is severe. A dividend that was intended to save tax can end up costing more than if it had been paid to the dentist personally. The exceptions are specific and must be documented.
Salary as an alternative
Salary is not subject to TOSI. If a family member works in the practice, paying a salary is simple, safe, and creates RRSP room for them. The trade-off is that salary costs the corporation CPP contributions and, if applicable, EI premiums.
Dividends do not create RRSP room. For a family member who will need retirement savings, salary may be worth the payroll cost.
Frequently asked questions
Can my adult child receive dividends from my dental corporation?
Yes, but TOSI will likely apply unless the child works in the practice an average of 20 hours a week, or the dividend is a reasonable return on money they put in themselves. If the child is a student who does neither, expect the dividend to be taxed at the top rate.
Does the age-65 exception work for my spouse?
It depends on your age, not your spouse’s. Once you turn 65, dividends paid to your spouse can be exempt from TOSI, but only if the dividend would have been exempt if you had received it yourself. Your spouse reaching 65 does not create the exemption on its own.
What counts as 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. For someone 18 to 24, only money or property they contributed counts, and the return allowed on it is limited. It must be defensible on the facts.
Does TOSI apply to capital gains on shares?
Often, yes. Taxable capital gains can count as split income. Gains on qualified small business corporation shares are an exception, and a share sale by a minor child to a related person can be taxed as a dividend instead. Talk to us before any share sale.
If I pay salary, do I need a formal employment agreement?
Not legally required, but it is good practice. CRA may examine whether the salary is reasonable for the work performed, and a written agreement helps support the position.
Talk to us about income-splitting at ghumans.ca/accounting-for-dentists.
General information only. Talk to us about your situation.