Tax on split income (TOSI) applies to Canadian residents who received taxable dividends, shareholder benefits, and income related to debt obligations from a private corporation unless they qualify as excluded amounts. If TOSI applies, the income received will be taxed at the top marginal tax rate (53.53% as of 2022) and added to Part I tax on the personal return. For example, students who received taxable dividends from a parent’s corporation would be subject to TOSI on those dividends. For students aged 18-24, four situations could result in the income being an “excluded amount,” and TOSI would not apply:
- The income is from a business that is not carried on by someone you are related to.
- The amount is from an excluded business, which means you worked there at least 20 hours/week for the current year or any five prior years.
- The income represents a safe harbour capital return, which is the highest prescribed rate for the quarter (in 2022, this ranged from 1% to 3%) multiplied by the fair market value of any property you contributed to the business during the year.
- The income represents a reasonable return, which is the amount of arm’s length capital you contributed to the business. The contribution cannot be capital borrowed from a related person. It needs to be from your own source of income.
Options 2, 3, and 4 might be difficult for full-time university students receiving dividend income from a parent’s corporation to meet, because you will likely not have the time to work there or the personal capital available to invest in the business. To avoid being taxed at the top marginal tax rate, it might be beneficial to receive the income as a reasonable salary instead of a dividend.
If you receive a salary from your parents’ business, it should be reported on a T4 slip and it will be included on your tax return as employment income. The business can deduct salary paid as an expense if it is reasonable. Reasonableness is based on the amount the business would pay an arm’s length employee for similar services. To avoid double taxation by way of a denied business deduction, your parents’ business should keep documents to support the reasonableness of salary paid such as a copy of your employment contract and contracts of other employees, copies of cheques paid, and/or a signed receipt if the business paid cash.
- Jane, Young Tax Professional