Income Splitting for CCPCs: What Business Owners Need to Know

Income Splitting for CCPCs: What Business Owners Need to Know

If you own a Canadian-Controlled Private Corporation (CCPC), income splitting may seem like an effective way to reduce your overall tax burden. Many business owners historically used dividends to distribute income among family members and lower taxes.

However, tax laws in Canada have changed significantly in recent years. What worked before may no longer be allowed today.

In this guide by Everoak Tax, we break down the updated income splitting rules, who still qualifies, and how to stay compliant with CRA regulations.

What Is Income Splitting?

Income splitting is a tax strategy where a business owner distributes income—usually through dividends—to family members who are in lower tax brackets.

The goal is simple:
👉 Reduce the total tax paid by the household

While this strategy was widely used in the past, stricter rules now limit its benefits.

What Changed After 2018?

Before 2018:

• CCPC owners could pay dividends to adult family members (18+)
• There were minimal restrictions
• It was a common and effective tax-saving strategy

After 2018, the introduction of Tax on Split Income (TOSI) rules changed everything:

• Dividends paid to family members may now be taxed at high rates (up to ~40% or more)
• Many traditional income-splitting strategies no longer provide tax benefits
• CRA now closely evaluates whether income splitting is reasonable

Who Can Still Benefit from Income Splitting?

Despite stricter rules, some exceptions still allow income splitting benefits.

1. Non-Service Businesses

Businesses that earn income primarily from selling products (not services) may still qualify.

Conditions include:

• Not a professional corporation (e.g., lawyers, doctors, accountants)
• Family member is 25 years or older
• Owns at least 10% of shares

2. Family Members Who Invest in the Business

If a family member has contributed capital:

• They may receive dividends
• Income splitting may still be valid

👉 The investment must be genuine and meaningful.

3. Family Members Actively Working in the Business

Income splitting may apply if:

• The family member works at least 20 hours per week
• This work has been consistent for 5 years or more

This shows active involvement, which is a key requirement under CRA rules.

Key Risk: “Reasonableness Test”

The CRA now applies a “reasonableness test” to determine:

• Is the income justified based on work performed?
• Is it reasonable compared to the investment made?

If not:
👉 The income may be taxed at the highest marginal rate

Why Professional Advice Matters

Income splitting rules are complex and frequently updated. A strategy that works for one business may not apply to another.

At Everoak Tax, we help CCPC owners:

• Evaluate eligibility for income splitting
• Stay compliant with CRA regulations
• Optimize tax strategies without risk

Final Thoughts

Income splitting is no longer a “one-size-fits-all” tax strategy in Canada. While opportunities still exist, they come with stricter conditions and higher scrutiny.

👉 The safest approach is to review your situation with a professional before distributing dividends.

FAQs

Is income splitting still allowed in Canada?

Yes, but only under specific conditions defined by TOSI rules.

What is TOSI?

Tax on Split Income (TOSI) is a rule that limits tax benefits from income splitting.

Can I pay dividends to my spouse?

Only if they meet CRA criteria (work, investment, or ownership requirements).

 

Contact Everoak Accounting Tax today to speak with a trusted GTA corporate tax accountant and take control of your corporate taxes with confidence.

To learn more about our company, please visit our website at www.everoaktax.com or contact us via email at info@everoaktax.com.