In Canada, taxpayers are taxed at a marginal rate. In general,
the higher the income, the higher the tax rate. Accordingly, the
motivation to redirect (split) income to another person, in the
hopes of lowering the respective tax rate, is common. Canada
Revenue Agency works to thwart such efforts with the tax on split
income ("TOSI") rules, starting with subsection 120.4(1)
of the Income Tax Act.
The scope of "split income" in the current version of
the TOSI rules is widely encompassing. This includes, but is not
limited to, dividends, income from a partnership, rental property
income, amounts in respect of a debt obligation, benefits, income
of a trust beneficiary and capital gains. However, the legislation
also delineates some forms of income as exempt from the TOSI
legislation, referred to as "excluded amounts". Income
from wages or salaries and publicly traded investments are also
TOSI exempt.
