Tax on split income
This guide explains the tax on split income, which taxes some family dividends at the top federal rate. It covers the exclusions in section 120.4 of the Income Tax Act. We prepare and file your articles of incorporation for $35.00, HST included. The government fee is separate and charged at cost: $200.00 to Corporations Canada under the CBCA, or $300.00 to the Ontario Business Registry under the OBCA. Open Corporation for $35 is a department of Gondaliya CPA. A Chartered Professional Accountant reviews this guide against Canada Revenue Agency guidance before it is published, and again after each federal budget.
What the tax on split income is
The tax on split income applies to certain income paid to a family member of a business owner. Where it applies, that income is taxed at the top federal rate.
The rules sit in section 120.4 of the Income Tax Act. Since 2018 they have applied to adults as well as children, so a dividend to a spouse or an adult child is tested.
| Who receives the dividend | How the rules apply |
|---|---|
| Child under 18 | Dividends from a family private corporation are caught, with very narrow exceptions |
| Adult aged 18 to 24 | Caught unless one of the limited exclusions for this age group applies |
| Adult aged 25 or over | Caught unless one of the exclusions applies |
| Spouse of an owner aged 65 or over | Excluded where the amount would be excluded in the owner's own hands |
Personal credits cannot reduce the tax on split income, apart from a short list that includes the dividend tax credit and the disability tax credit.
Who counts as family for the rules
The rules test income received by a Canadian resident who is related to someone involved in the business. That person is called the source individual.
Related means connected by blood, marriage, common-law partnership or adoption. Spouses, children, grandchildren, parents and siblings are all related for this purpose.
| Relationship to the owner | Related for the rules? |
|---|---|
| Spouse or common-law partner | Yes |
| Child or grandchild | Yes |
| Brother or sister | Yes |
| Aunt, uncle, niece or nephew | No |
Our salary against dividends guide explains how the two forms of pay differ before these rules apply.
Our $35.00 fee includes HST. Government fees are passed through at cost with no mark-up. Every figure is on our full pricing page.
The exclusions that let a dividend survive
A dividend escapes the tax on split income only if it falls within an exclusion. Each exclusion has its own conditions, and the age of the recipient decides which ones are open.
| Exclusion | Main condition | Ages |
|---|---|---|
| Excluded business | Actively engaged in the business on a regular, continuous and substantial basis, in the year or in any five earlier years | 18 or over |
| Excluded shares | Owns shares carrying 10 percent or more of the votes and value of a corporation that is not a services or professional business | 25 or over |
| Reasonable return | The amount is reasonable for the person's contributions of work, capital and risk | 25 or over |
| Spouse of an owner aged 65 or over | The amount would be excluded in the owner's own hands | Any age |
The Canada Revenue Agency accepts an average of at least 20 hours a week as actively engaged. For a seasonal business, the average covers the part of the year it operates.
The excluded shares exclusion has further conditions. Less than 90 percent of the corporation's business income may come from services, and it must not be a professional corporation.
We file your incorporation for $35.00, HST included
Government fee shown separately at cost. A CPA tests each family dividend against the exclusions first.
Adults aged 18 to 24
An adult aged 18 to 24 has fewer exclusions. The excluded shares and reasonable return exclusions are not open to that age group.
A dividend can still be excluded if the person was actively engaged in the business. A return on capital the person contributed from their own funds can also be excluded, at a prescribed rate.
| Route | Open at 18 to 24? |
|---|---|
| Excluded business | Yes |
| Return at the prescribed rate on the person's own capital | Yes |
| Excluded shares | No |
| Reasonable return | No |
A child under 18 has very few routes out. Dividends from a family corporation to a minor are taxed at the top rate in almost every case.
Salary instead of dividends
The tax on split income applies to dividends and some other amounts, such as certain interest. A salary is not split income, so it is tested differently.
A salary to a family member must be reasonable for the work actually done. Any part above that is not deductible to the corporation.
| Payment to a family member | Test that applies |
|---|---|
| Dividend | The tax on split income exclusions |
| Salary | Reasonable for the services performed |
| Interest on a loan to the corporation | Can be split income unless an exclusion applies |
A salary needs a payroll account. Our payroll setup guide explains how one is opened.
Shares issued to a family member after the fact do not change who owned them on the day a dividend was paid.
What restructuring costs
Meeting an exclusion can mean changing the share structure. Adding a share class to existing articles is an amendment with its own government fee.
The table sets out each charge, its HST treatment and who collects it.
| Item | Amount | HST | Total | Who charges it |
|---|---|---|---|---|
| Our incorporation filing fee | $35.00 | Included | $35.00 | Open Corporation for $35 |
| Federal articles of incorporation | $200.00 | Not applicable | $200.00 | Corporations Canada |
| Ontario articles of incorporation | $300.00 | Not applicable | $300.00 | Ontario Business Registry |
| Federal articles of amendment | $200.00 | Not applicable | $200.00 | Corporations Canada |
| Ontario articles of amendment | Not confirmed, reviewer to verify on the official registry page | Not applicable | Not confirmed, reviewer to verify on the official registry page | Ontario Business Registry |
Our $35.00 fee includes HST and government fees are passed through at cost with no mark-up. These figures were last checked on 7 September 2026.
What a CPA checks before a family dividend
This guide explains the rules. It cannot tell you whether a dividend to your family survives, because that depends on ages, work and share ownership.
Ages are the first thing we look at. Each family shareholder is placed in the under 18, 18 to 24 or 25 and over group.
Then work. We record the hours each family member spends in the business, against the 20 hours a week the Canada Revenue Agency accepts.
Then the shares. We check votes and value against the 10 percent test, and whether the business is a services business.
Then the alternatives. Where no exclusion fits, we compare a reasonable salary with the dividend that would be taxed at the top rate.
Last, the records. We keep the evidence each exclusion needs in the minute book. The parent firm sets out the same ground in its Gondaliya CPA resources library.
Frequently asked questions
These are the questions owners ask about the tax on split income. Each answer carries the figure, the rule or the body that makes it true, so it can be read on its own.
What is the tax on split income?
Does the tax on split income apply to my spouse?
What does actively engaged mean?
Can my adult child receive dividends?
What are excluded shares?
Does the tax on split income apply to salary?
What happens to a dividend paid to a child under 18?
What does it cost to change the share structure?
Why owners trust the filing to us
Gondaliya CPA Professional Corporation is registered with CPA Ontario under firm registration number 61330051. Our clients have left us 1,300+ five-star Google reviews, and we work from 13 Ontario offices, open 9:00 AM to 8:30 PM, Monday to Sunday. We back every filing with a 30-day money-back guarantee and a 60-day fee-matching policy, and we are a Xero Partner Award Winner 2026. Open Corporation for $35 is a department of Gondaliya CPA.
Ready to incorporate
Send the intake form and we will confirm your jurisdiction, your share structure and your year end before anything is filed. Our fee is $35.00, HST included, and the government fee is shown separately at cost. Payment is by Interac e-Transfer to info@gondaliyacpa.ca, and the security question is Not Applicable because auto-deposit is enabled.
No legal advice
Gondaliya CPA Professional Corporation is a firm of Chartered Professional Accountants licensed by CPA Ontario, firm registration number 61330051. It is not a law firm. We prepare and file corporate documents and we provide accounting and tax advice. Nothing on this page is legal advice, and reading it creates no solicitor and client relationship. For legal advice, including advice on a shareholder agreement among family members, consult a lawyer licensed in the province where your corporation carries on business.
