Excluded shares (TOSI exception)

The term can matter when a private company pays dividends to a family member, or a sale involves shares a family member holds. The CRA says tax on split income (TOSI) generally applies when a specified individual has split income that is not an excluded amount, and excluded shares are one of the exclusions. See tax on split income for the tax itself.

The conditions the CRA lists

The CRA lists this exclusion only for individuals who meet an age test at the end of the year. The shares must be owned by the specified individual and all of the CRA’s conditions must be met. They include:

• a test on how much of the corporation’s business income comes from providing services
• the corporation is not a professional corporation carrying on the practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor
• the individual owns a required proportion of the shares, by value and by votes
• all or substantially all of the corporation’s income for the relevant tax year is not derived, directly or indirectly, from a related business other than a business of the corporation

Each condition has detail in section 120.4(1) of the Income Tax Act and on the CRA’s page, so do not rely on a summary. The CRA’s page shows a federal TOSI amount and, outside Quebec, a provincial or territorial one, both worked out on Form T1206. For the family-sale side, see how to transition a family business through a sale.