Once a family transfer leaves a spouse, adult child, or minor holding shares, a new problem starts: the tax-on-split-income rules, known as TOSI, tax most dividends paid to a family member who is not genuinely earning them at the top personal rate, with no graduated brackets. A narrow set of exceptions decide whether a specific dividend escapes that result — and a completely separate, harsher rule applies where the family member is a minor.
Key takeaways
SECTION 01 OF 05
Section 120.4 of the Income Tax Act taxes an individual's split income — broadly, dividends and certain capital gains connected to a related business — at the highest personal marginal rate, with none of the graduated brackets or personal credits that would otherwise apply. A family transfer that leaves a spouse or child holding shares, whether through a freeze, a gift, or a purchase, puts every dividend those shares pay squarely inside the rule unless it fits one of a small number of defined exceptions. A spouse's dividend the split-income rules could not reach and Two children in the business and one outside it are two illustrations of how narrowly this actually plays out.
SECTION 02 OF 05
For a specified individual who has reached 24, an amount is excluded from split income if it is income or a capital gain from “excluded shares” — broadly, shares of a corporation that is not a professional corporation, earns less than 90% of its business income from services, and in which the individual owns shares carrying at least 10% of the votes and 10% of the value — or if it is a reasonable return on the individual's own contribution. Treadstone Law's explanation of the excluded shares test covers what trips people up in practice. For someone who has turned 17 but not yet 24, the excluded-shares route does not apply at all; only a safe-harbour or reasonable return on capital the individual contributed themselves, at arm's length, can shelter the amount.
SECTION 03 OF 05
An individual is deemed to be actively engaged in a business on a regular, continuous and substantial basis if they work in it an average of at least 20 hours a week during the portion of the year the business operates — a bright-line safe harbour that, once met, removes the individual's income from that business from split income altogether, no exception-by-exception analysis required. This is the single most direct route out of TOSI for a family member who is genuinely working in the business, and the reason “actively engaged” is worth confirming with actual hours rather than a title.
SECTION 04 OF 05
None of the exceptions above are available to a specified individual who has not turned 17 before the year. Instead, a separate provision converts what would otherwise be a taxable capital gain on shares transferred, directly or indirectly, to a person the minor does not deal with at arm's length: the gain is deemed not to be a capital gain at all, and twice the amount is deemed to be received as a taxable dividend that is not an eligible dividend. A fifteen-year-old's freeze shares, and a doubled dividend is exactly this mechanism. Treadstone Law's guide to the kiddie tax on minor children covers the same rule in the context it usually comes up: income split through a family business or trust.
SECTION 05 OF 05
The three regimes above — full excluded-shares access at 24 and over, a narrower capital-only exception from 17 to 23, and the minor's doubling rule below 17 — are easy to collapse into a single "under 25" concept, and doing so produces the wrong answer for anyone under 17. The age that actually governs a specific dividend has to be checked against the individual's exact age before the taxation year in question, not against a rough sense of how old they are. This is background for the conversation, not a substitute for it — Treadstone is an AI consulting firm, not a law firm or an accounting practice, and the specific numbers and elections below belong to your own accountant and an estates or corporate lawyer working from your actual figures.
No. The excluded-shares route is only available once a specified individual has turned 24. Between 17 and 23, only a safe harbour or a reasonable return on the individual’s own arm’s-length capital contribution can shelter the amount — the excluded-shares test itself doesn’t apply at that age.
No. Working an average of at least 20 hours a week while the business operates is itself a bright-line safe harbour that removes the individual’s income from split income altogether, with no exception-by-exception analysis required — the most direct route out of TOSI for someone genuinely working in the business.
No. None of the adult exceptions are available to a specified individual who has not turned 17. A separate, harsher rule instead converts what would otherwise be a capital gain on shares transferred to a non-arm’s-length person into twice that amount, deemed received as a taxable dividend that is not an eligible dividend.
Sources
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