Why TOSI hits doctors harder
Key takeaways
- The excluded-shares exception to TOSI is not available to a medical professional corporation because it is a professional corporation under the Income Tax Act.
- That means a doctor cannot use the simplest income-splitting route available to a non-professional business.
- Dividends paid to family who do not meet the 20-hour rule or another exception are taxed at the top marginal rate.
- Doctors who split income without checking these rules first risk a CRA reassessment if the dividend does not qualify for an exception.
What TOSI does
The tax on split income rules are designed to stop business owners from shifting income to family members in lower tax brackets by paying them dividends. If TOSI applies, the dividend is taxed at the top marginal rate regardless of the recipient’s actual income.
For a doctor, TOSI hits hard because the excluded-shares exception, the one that protects most commercial businesses, is not available. Under the Income Tax Act, a professional corporation does not qualify for excluded shares.
How doctors are different from commercial businesses
| Scenario | Can use excluded shares? | Maximum TOSI-free dividend to spouse |
|---|---|---|
| Retail business corporation | Yes | Not limited by TOSI |
| Medical professional corporation | No | Only through the 20-hour rule, reasonable return, or the doctor turning 65 |
The three routes that remain
- Excluded business (20-hour rule): a family member works an average of 20 hours per week in the medical practice. This is the most reliable route for a spouse who works in the office.
- Reasonable return: the dividend 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 amount is capped by a set formula. This route works for family who contribute some time or capital but not enough to meet the 20-hour threshold.
- Age 65: once the doctor turns 65, dividends paid to their spouse can be exempt from TOSI. This only works if the dividend would have been exempt if the doctor had received it.
A common doctor TOSI mistake
The mistake that comes up most often: a doctor incorporates, makes their spouse a non-voting shareholder, and pays the spouse a dividend each year. The spouse has no other income and does not work in the practice. The doctor expects the dividend to be taxed at the spouse’s low rate.
Under TOSI, that dividend is taxed at the top personal rate instead, even though the spouse has no other income. The dividend tax credit still applies, but the bill is far higher than the doctor expected.
Why this matters: a doctor’s medical corporation looks like a great tax-planning tool until TOSI limits how family can share in the income. The rules are specific, and the penalties for getting them wrong are harsh.
Salary as a TOSI-free alternative
Salary is not subject to TOSI. If a family member works in the practice, paying a salary, even a modest one for part-time work, avoids the TOSI trap entirely. Salary also creates RRSP room for the recipient, which dividends do not.
The trade-off is payroll costs. Salary requires CPP contributions and, if applicable, EI premiums. But for many families, the RRSP room and TOSI safety are worth it.
Frequently asked questions
Why is excluded shares not available to a medical professional corporation?
The Income Tax Act defines specific types of corporations that qualify for excluded shares. Professional corporations, including medical corporations, are explicitly excluded from the definition.
Can my spouse be a shareholder in my medical corporation?
Provincial College rules vary. In BC, voting shares must be held by physicians. Non-voting shares may be held by family.
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.
Can I split income with my adult children through the practice?
Only if they meet the 20-hour rule or another exception. A child who is a university student and not working in the practice cannot receive TOSI-free dividends.
What if I pay my spouse a bonus instead of a dividend?
A bonus is salary. It is subject to payroll deductions but is not caught by TOSI. Salary is a safe way to move income to a spouse who works in the practice.
Talk to us about your TOSI planning at ghumans.ca/doctors.
General information only. Talk to us about your situation.