Excluded business (TOSI)

Tax on split income, or TOSI, can reach income such as taxable dividends on shares of a corporation not listed on a designated stock exchange, which the CRA lists as split income. The excluded business test is one way income can fall outside it. Owners meet it when a family company has paid dividends to relatives and an adviser or buyer asks whether TOSI applied.

How the test works

Section 120.4 defines an excluded business by the individual’s own involvement: active engagement on a regular, continuous and substantial basis in the business activities in the year (except for an amount described in paragraph (e) of the split income definition), or in any five prior taxation years. The CRA calls the second route the 5-year test. It adds that gains from disposing of property are an excluded amount under this exception only if the individual satisfies the 5-year test. The excluded amount definition also has age conditions, so read it in the Act.

What to ask

• Who received dividends or other income from the company, and whether each is a specified individual
• What work each recipient did in the business, and in which years
• Whether the company relied on this exception or on a different one in section 120.4, such as excluded shares

For family transfers of a business, see how a discretionary family trust can be used in business succession.