High-net-worth families in Canada often ask why two households earning the same total income can pay very different amounts of tax. The difference usually comes down to income splitting—and whether the family understands and complies with attribution rules and the Tax on Split Income (TOSI).

This article combines all three parts of Canada’s income-splitting framework into one clear guide, covering:

• Attribution rules (the foundation)
• CRA-compliant strategies with spouses
• Income-splitting options involving children and family trusts

Momentum Accounting CPA Professional Corporation advises families and business owners across Toronto, Mississauga, Brampton, Oakville, Milton, Hamilton, Vaughan, Markham, Ottawa, and across Ontario.

Part 1: Understanding Income Splitting & Attribution Rules

What Is Income Splitting?

Income splitting is a tax strategy that allocates income to family members in lower tax brackets to reduce a family’s overall tax burden. Because Canada uses progressive tax rates, uneven income distribution often results in higher total tax.

To prevent abuse, CRA enforces attribution rules and TOSI.

What Are Attribution Rules?

Attribution rules may cause income, capital gains, or losses from property you gift or loan to a family member to be taxed back in your hands, even if the family member earns that income.

Key provisions of the Income Tax Act:

• s.74.1(1) – transfers to spouses
• s.74.1(2) – transfers to minor children
• s.74.2 – capital gains attribution

These rules mainly apply to investment and property income, not active business income.

Business Income vs Investment Income (Critical Distinction)

• Business income: Active work (services, operations) → generally not attributed
• Investment / property income: Interest, dividends, rent, capital gains → often attributed

Understanding this distinction is essential in family tax planning.

What Is TOSI? (Featured-Snippet Definition)

Tax on Split Income (TOSI) applies when income—such as dividends—is paid from a private corporation to a related family member who is not meaningfully involved in the business. When TOSI applies, that income is taxed at the highest marginal tax rate, eliminating income-splitting benefits.

TOSI primarily affects dividends paid to spouses or adult children from private or professional corporations.

Part 2: Income-Splitting Strategies with a Spouse (CRA-Compliant)

Despite attribution rules, income splitting with a spouse is still possible when structured correctly.

Common CRA-Compliant Strategies

• Spousal RRSPs – income grows tax-deferred; attribution applies only on early withdrawals
• Spouse’s TFSA – income is tax-free and not subject to attribution
• Prescribed-rate loans – interest charged at CRA prescribed rate and paid by January 30 each year
• Second-generation income – income earned on reinvested income may avoid attribution if tracked properly
• Reasonable salary – spouse must perform real work at market rates
• Dividends (TOSI-sensitive) – only effective where TOSI exemptions apply

⚠️ Missing interest payments, unreasonable salaries, or poor documentation can trigger reassessments.

Part 3: Income Splitting with Children & Family Trusts

Income splitting with children is more restricted, but planning opportunities still exist.

Adult Children (18+)

• No attribution on gifted assets
• Deemed disposition at fair market value applies
• TOSI may apply to corporate dividends
• Income from active businesses is generally taxed in the child’s hands

Minor Children

• Property income is attributed back
• Capital gains are not attributed
• Growth-oriented investments are often preferred

Family Trusts

Family trusts are commonly used by high-net-worth families to:

• Control timing and distribution of income
• Protect assets
• Manage exposure to attribution and TOSI

Key points:

• Income to minor children may be attributed
• Capital gains can be taxed in beneficiaries’ hands
• Prescribed-rate loans to trusts may avoid attribution if rules are met

Registered Plans (Children)

• RESPs – tax-deferred growth, taxed in student’s hands
• RDSPs – long-term planning for disabled dependents

These are powerful income-splitting and estate-planning tools when used properly.

Business & Succession Strategies

• Employ children at reasonable wages
• Support adult child-owned businesses
• Plan around the Lifetime Capital Gains Exemption (LCGE) using trusts and estate freezes

Frequently Asked Questions 

Can income still be split legally in Canada?

Yes. Income splitting is still possible using CRA-compliant strategies when attribution rules and TOSI are respected.

What is the biggest income-splitting risk?

Poor documentation, missing prescribed-rate loan payments, or ignoring TOSI.

Do attribution rules apply to adult children?

Generally no—but TOSI and deemed disposition rules still matter.

Are family trusts still effective?

Yes, but only with proper structuring and ongoing compliance.

Key Takeaways

• Attribution rules and TOSI limit—but do not eliminate—income splitting
• Spouses, minor children, and adult children are treated differently
• Investment income is more restricted than business income
• Planning must occur before transfers
• Professional advice is essential for high-net-worth families

How Momentum Accounting CPA Professional Corporation Helps

We assist families and professionals with:

• Attribution & TOSI analysis
• Family tax planning
• Trusts & succession planning
• Corporate and professional corporations

📞 647-717-1242

📧 info@momentumaccountingcpa.ca

📍 Serving Ontario & Canada-wide

Disclaimer

This article is for general information only and does not constitute tax or legal advice. Individual circumstances vary. Please consult a qualified CPA before implementing tax strategies.