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An Overview to Tax on Split Income (TOSI) Rules

The Tax on Split Income (TOSI) is a set of tax rules designed to prevent income splitting between family members to reduce overall tax liability. The aim is to ensure that high-income individuals cannot allocate their income to family members subject to lower tax rates. I came across a great flow chart from Moodys and wanted to share it. It would be strange if I just posted that picture, so ill explain a little about TOSI or tax on split income.


https://moodystax.com/wp-content/uploads/Moodys_Gartner_Tax_Law_Income-Sprinking-Flowchart_8.5×11.pdf


What is TOSI?


TOSI stands for Tax on Split Income. It refers to a set of rules implemented by tax authorities to prevent individuals from splitting their income with family members who may be subject to lower tax rates. Income splitting involves transferring income-generating assets or income streams to family members, such as spouses, children, or relatives, to reduce the overall tax burden.


Purpose of TOSI:


The primary purpose of TOSI is to maintain the integrity of the tax system and prevent individuals from using income-splitting strategies to exploit lower tax rates available to family members who are not actively involved in the business or investment generating the income. TOSI aims to ensure that income is taxed appropriately based on the individual’s level of involvement and contribution.
Key Provisions of TOSI:

  1. Split Income: TOSI applies to certain types of income, known as “split income.” This includes income derived from a related business, partnership, or corporation, dividends on shares owned by a related individual, and certain other income sources specified by tax authorities.
  2. Related Individuals: TOSI rules apply when income is split with related individuals, such as a spouse, common-law partner, or minor children. The rules also extend to other family members in certain circumstances.
  3. Reasonableness Test: TOSI rules employ a “reasonableness test” to determine whether the income-splitting arrangement is legitimate. The test evaluates the individual’s level of involvement, contribution, and the risks assumed in generating the income.
    TOSI rules impact high-income individuals and families who engage in income-splitting. The rules restrict the ability to allocate income to family members subject to lower tax rates without a genuine contribution to the income-generating activity. Taxpayers must carefully assess the application of TOSI rules to avoid penalties, reassessment, and potential tax liability.

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