Canada’s Income Splitting Rules & TOSI Updates for 2025

Hands on a financial report with coins and a calculator, titled "Canada's Income Splitting Rules & TOSI Updates.

Canada’s income splitting rules saw a major shift with the expanded Tax on Split Income (TOSI) regime that took effect on January 1, 2019. These reforms significantly impacted small business owners and their families by tightening the ability to use income splitting as a tax minimisation tool. 

Once-flexible strategies have now become limited, requiring business owners to adapt both their financial plans and corporate structures to remain compliant. For those navigating these changes, working with experienced Canadian tax professionals can provide valuable clarity and guidance tailored to your unique circumstances.

Navigating the current income splitting rules in Canada demands a deeper understanding of both the TOSI framework and the Canada Revenue Agency income splitting rules. In this article, we’ll explore what has changed, who is affected, and what practical strategies still exist. 

For Canadian families and business owners revisiting their tax planning approach, this guide offers the clarity you need to make informed decisions and stay ahead of evolving CRA requirements.

Graphic outlining key changes to income splitting in Canada.

What Is Income Splitting in Canada?

Income splitting is a tax planning strategy in Canada that allows higher-income individuals to shift certain types of income to lower-income family members. This approach helps reduce the overall family tax burden by taking advantage of the country’s progressive tax system, where lower income levels are taxed at lower rates.

There are several methods allowed under the Canada Revenue Agency income splitting rules, though some are restricted by the Tax on Split Income (TOSI) rules. Common income splitting strategies include:

  • Pension income splitting (for retirees aged 65+)
  • Spousal loans at CRA’s prescribed interest rate
  • Hiring family members at fair market wages
  • Dividend splitting through private corporations (subject to TOSI rules)

Understanding what is income splitting in Canada and who is eligible for income splitting in Canada is key to ensuring compliance and minimising your tax liability.

Income Splitting Strategy in Canada 

When implemented properly, income splitting rules in Canada offer several tax-efficient strategies for families. Two of the most common methods are:

  • Spousal Loans: A higher-income spouse lends funds to a lower-income spouse at the CRA’s prescribed interest rate. The borrowed funds are invested, and any net investment income is taxed in the hands of the lower-income spouse at their applicable marginal tax rate. To comply with revenue Canada income splitting rules, interest must be paid annually by January 30.

     

  • Family Trusts: A family trust allows income from investments or business operations to be distributed to various family members. This enables income to be taxed in the hands of lower-income beneficiaries, reducing the household’s overall tax liability.

To use income splitting effectively, strategies must comply with Canada Revenue Agency income splitting rules and avoid triggering the tax on split income (TOSI). 

The CRA monitors for abusive arrangements, and non-compliance may lead to penalties or reassessments. While income splitting is a smart way to reduce taxes, it must be carefully structured to stay within legal limits.

How Do Income Splitting Rules in Canada Work Now?

Since the expansion of the Tax on Split Income (TOSI) regime in 2018, income splitting rules in Canada have become much stricter. Previously, TOSI only applied to minors under 18. Today, anyone aged 18 or older may also be affected, especially if they receive split income from a related business.

Under current Canada Revenue Agency income splitting rules, the tax on split income TOSI now applies to adults who don’t meet specific exemption criteria, taxing their income at the highest marginal tax rate. 

This eliminates the benefit of assigning income to lower-income family members. However, certain exceptions remain for business owners. 

In most cases, the income recipient must be an immediate family member, such as a spouse, parent, child, or sibling, not extended relatives like uncles, aunts, nieces, or nephews.

Two professionals reviewing a document with TOSI exemptions listed.

What’s Exempt from TOSI Under Income Splitting Rules in Canada?

While the tax on split income (TOSI) rules significantly limit who can benefit from income splitting, the Canada Revenue Agency income splitting rules outline several important exemptions:

1. Excluded Business Gains (Ages 18–24)

If a family member aged 18–24 works an average of 20+ hours per week in the business either during the current year or in any five previous taxation years (not necessarily consecutive), their income may be exempt from TOSI.

  • Even if the business is seasonal, the 20-hour test applies only to the months of operation.
  • Dividends earned after active involvement may still be exempt, provided they are considered reasonable compensation.

2. Excluded Shares (Age 25+)

Dividends paid to a family member aged 25 or older are exempt from TOSI if they own at least 10% of the corporation’s votes and value.

Note: This exemption does not apply to professional corporations (such as those operated by lawyers, accountants, doctors, dentists, etc.) or to service-based businesses that earn 90% or more of their income from the provision of services.

3. Other Exemptions

  • Business Owners Aged 65+: Income splitting with a spouse is generally permitted for those 65+ who contributed to the business.
  • Capital Gains on Qualified Property: Gains from selling qualified small business shares, family farm, or fishing property are typically exempt from TOSI under specific CRA guidelines.

Navigating the Complexity of Canada’s Income Splitting Rules

The income splitting rules in Canada, particularly the TOSI exemptions, remain highly complex and continue to evolve with ongoing guidance from the Canada Revenue Agency (CRA) and tax court rulings.

From defining what qualifies as a “reasonable return” to properly documenting a family member’s contribution to the business, these areas are full of technicalities. Making assumptions without proper guidance can expose you to compliance risks. 

For many small business owners, realigning with the expanded TOSI rules requires a detailed review of corporate structures, dividend policies, and recordkeeping practices.

Final Thoughts: Income Splitting Still Has a Place with Caution

While the income splitting rules in Canada have become more restrictive under the expanded Tax on Split Income (TOSI) framework, strategic opportunities still exist, particularly for business owners who understand the details. 

With the right guidance, you can still reduce your family’s overall tax burden while staying fully compliant with Canada Revenue Agency income splitting rules.

If you’re asking, “Who is eligible for income splitting in Canada?”, the answer lies in understanding both the exceptions and the documentation required to support your claim. As we move through 2025, proactive planning, not guesswork, is essential. 

With increasing CRA oversight and potential penalties for non-compliance, this is the ideal time to reassess your income-splitting strategy.

To navigate this evolving landscape with confidence, consult a qualified offshore tax professional who can help customise strategies to your family’s situation. Done right, income splitting can still be a powerful tool to optimise your tax position and preserve generational wealth.

Spousal Loan Strategy in Canada: A Smart Tax Planning Tool

Spousal loan strategy in Canada highlighted as a smart tax planning tool.

While many Canadians focus on individual tax-saving methods, they often miss out on strategic family-based tax planning opportunities that could significantly reduce their overall tax burden. One such overlooked tactic is the spousal loan strategy in Canada, which allows couples to legally split income and lower their collective tax liability by lending funds from a higher-income spouse to a lower-income spouse at the CRA’s prescribed interest rate.

However, income splitting isn’t as simple as transferring money between spouses. The Canada Revenue Agency (CRA) enforces attribution rules under the Income Tax Act, which prevent high earners from gifting money to their spouse and shifting the tax burden. 

For example, if a high-income individual gives $100,000 to their spouse to invest, the investment income is typically attributed back and taxed at the higher marginal rate. The spousal loan strategy provides a compliant workaround, ensuring the income is taxed in the hands of the lower-income spouse when structured correctly.

What Is a Spousal Loan?

A spousal loan is a legal financial arrangement where a higher-income spouse lends money to a lower-income spouse (or to a family trust for the benefit of minor children) at the CRA prescribed rate spousal loan. The goal is to enable the lower-income spouse to invest the loaned funds and earn taxable income such as dividends, interest, or capital gains, which is then taxed at their lower marginal tax rate.

When structured properly, this strategy avoids CRA attribution rules that would otherwise tax the income in the hands of the higher-income spouse. It’s one of the few compliant ways Canadian families can split income and reduce their overall tax burden, especially in a low-interest environment.

Overview of spousal loan strategy for tax savings in Canada.

 

Smart Income Splitting with Spousal Loans

  • Legitimate Income-Splitting Tool
    The spousal loan strategy in Canada is a compliant way to shift income within a family without triggering CRA attribution rules.
  • Ideal for Low-Interest Environments
    It’s especially effective when the prescribed interest rate for spousal loan is low, increasing the potential tax savings.
  • Loan to Spouse or Family Trust
    A high-income spouse can lend funds to a lower-income spouse or a family trust for minor children to generate investment income taxed at lower rates.
  • Returns Must Exceed Interest Rate
    For the strategy to work, the investment return must exceed the spousal loan interest rate in Canada to ensure a positive after-tax gain.
  • Timely Wealth-Building Opportunity
     With current CRA rates remaining low, this strategy offers Canadian families a valuable chance to grow wealth efficiently and legally.

How the Spousal Loan Strategy in Canada Works

To successfully implement the spousal loan strategy, two key conditions must be met to ensure the income is not attributed back to the higher-income spouse:

A Formal Written Agreement Must Be in Place

  • The loan must be clearly documented with a signed agreement stating the amount, terms, and spousal loan interest rate in Canada.
  • The interest rate must be set at or above the CRA’s prescribed rate in effect at the time the loan is issued, which has typically ranged between 1% and 2% in recent years.
  • Proper documentation helps validate the arrangement if reviewed by the CRA and avoids unfavourable loan to family member tax implications.

Interest Must Be Paid Annually by January 30

  • The borrowing spouse must pay the full annual interest on or before January 30, which is the official spousal loan interest payment date as required by the CRA.
  • Missing this deadline could trigger CRA attribution rules, causing all income to be taxed in the hands of the high-income lender.
  • When both conditions are met, the investment income earned, whether through capital gains, dividends, or interest, is taxed at the lower-income spouse’s marginal rate, resulting in significant long-term tax savings for the family.
Infographic listing five benefits of the spousal loan strategy: tax savings, capital gains advantage, CRA compliance, no age limit, and wealth building.

Benefits & Key Statistics of the Spousal Loan Strategy

  • Significant Tax Savings
    Helps reduce family tax bills by shifting income from a high-income spouse (taxed at up to 50%) to a lower-income spouse (taxed at around 26% or less).
  • Optimises Capital Gains Threshold
    Recent corporate tax legislation changes have raised the capital gains inclusion rate to 66% for amounts exceeding $250,000, while gains below that threshold continue to benefit from the 50% inclusion rate. The first $250,000 still enjoys the 50% inclusion rate, which can be maximised by directing gains to the lower-income spouse.
  • Complements Other Income-Splitting Tools
    Works alongside spousal RRSPs and pension income splitting. Unlike those, the spousal loan strategy has no age limits or contribution ceilings, making it a flexible planning option.

Legislative Context

  • New Capital Gains Rules for Corporations and Trusts
    Since June 25, 2024, a 66% inclusion rate applies to capital gains over $250,000 for corporations and trusts.
  • Individuals Still Benefit from Lower Rate
    Individuals still benefit from a 50% capital gains inclusion rate on the first $250,000 of annual gains, preserving a valuable tax advantage under the current rules.
  • Boosts the Spousal Loan Strategy
    By shifting gains to a lower-income spouse, families can keep more income within the lower inclusion threshold, enhancing tax efficiency.

Integrating into the Canadian Corporate Context

  • Federal Corporate Tax Rate
    The current federal corporate tax rate in Canada is 15%.
  • Ontario Corporate Tax Rate
    In Ontario, the general rate is around 11.5%, creating a combined effective rate of about 26.5%.
  • Small Business Tax Rate (Q2)
    The small business company tax rate in Q2 in Ontario is approximately 12.2%, in line with national corporate tax brackets.
  • Ongoing Legislative Changes
    All corporate rates are subject to annual updates via corporate tax legislation changes, which impact tax planning at both corporate and personal levels.

Next Steps & References

Once you understand how the spousal loan strategy works, the next step is putting it into action, correctly and compliantly. Here’s how:

  • Track the CRA’s Prescribed Interest Rate
    CRA updates its rate quarterly, typically between 1% and 2%. Ensure your loan reflects the prescribed interest rate for spousal loans.
  • Prepare a Formal Loan Agreement
    A clear written agreement helps prove that the loan is legitimate and prevents adverse loan to family member tax implications.
  • Monitor Tax Legislation Changes
    Stay updated on changes to personal tax brackets, capital gains rules, and spousal loan interest rate in Canada to maintain compliance.

Conclusion

The spousal loan strategy in Canada is a tax-efficient, low-risk method to split income legally and reduce a family’s overall tax bill. When set up correctly with a formal agreement, annual interest payments, and awareness of legislative updates, this strategy becomes a cornerstone of smart financial planning.

Whether you’re navigating new capital gains rules or aligning with shifting CRA prescribed rate spousal loan policies, spousal loans can help families preserve wealth, and do so within full legal compliance.