Is Income Splitting Through a Professional Corporation Still Worth It After TOSI? A Guide for Ontario Physicians and Dentists

By Shahriar Jahanshahi, Jahanshahi Law Firm, Toronto | Last updated: September 2026 | Figures reflect 2026 rates unless noted

The short answer

For most Ontario physicians and dentists, income splitting through a professional corporation by paying dividends to family members who don’t work in the practice no longer saves meaningful tax. The tax on split income (TOSI) rules in section 120.4 of the Income Tax Act were expanded to adults in 2018. Most taxable dividends from a professional corporation to a spouse, child or parent are now taxed at the top marginal rate.

The excluded shares exception, which protects many other family businesses, never applies to a medical or dental professional corporation.

Income splitting may still be available in narrower circumstances:

a spouse or adult child works in the practice an average of at least 20 hours per week, this year or in any five earlier years;
the practitioner is in the taxation year they turn 65 or a later year, for qualifying amounts paid to their spouse;
a family member aged 25 or older receives a demonstrably reasonable return on work, capital or risk they contributed
qualifying capital gains arise on a sale of the corporation’s shares.

Being outside TOSI does not guarantee a tax saving. The attribution rules, how the shares were acquired and funded, and regulatory ownership requirements all need separate review.

Incorporation itself remains valuable for many practitioners because of the tax deferral on retained income. TOSI substantially reduced the income splitting advantages of incorporating, but it did not eliminate that deferral.

What TOSI does and why it catches professional corporations

TOSI applies to “split income” received by a “specified individual” from a “related business.” Split income includes taxable dividends on private company shares, whether held directly or through a trust. A business is a related business if a related person, such as the physician or dentist spouse or parent, is actively engaged in it on a regular basis.

A professional corporation almost always meets that definition for the practitioner’s family. The practitioner is actively engaged in the practice, and the corporation’s income comes from that work. Taxable dividends paid to a family shareholder will therefore generally fall within the definition of split income unless an exclusion applies.

Split income is taxed at the top combined federal and Ontario rate, without the benefit of graduated brackets. For non-eligible dividends, which is what most professional corporations pay because their income qualifies for the small business deduction, that rate is about 47.7% in Ontario for 2026.

Who can own shares of an Ontario professional corporation

Under Ontario’s Business Corporations Act, the voting shares of a professional corporation must be held by members of the relevant regulatory college. For physicians that is the College of Physicians and Surgeons of Ontario (CPSO), and for dentists the Royal College of Dental Surgeons of Ontario (RCDSO).

Medicine and dentistry have an additional permission. The practitioner’s spouse, children and parents may hold non-voting shares, and individual trustees may hold non-voting shares in trust for the minor children of a voting shareholder. This is a narrow permission. It does not allow a general discretionary family trust with a mix of beneficiaries, and a holding company cannot be a shareholder.

A family member who is also a member of the same college, such as a physician married to a physician, is not limited to non-voting shares. For other regulated health professions, non-member family shareholders are generally not permitted, although a family member who independently meets that profession’s ownership requirements can hold shares.

Why the excluded shares exception does not apply

The excluded shares exception is the broadest TOSI exclusion for adults. It lets an individual aged 25 or older receive dividends and capital gains outside TOSI. The individual must directly own shares carrying at least 10% of the votes and 10% of the value of the corporation, and the corporation must meet further conditions.

Medical and dental professional corporations fail this exception in three ways:

The statute excludes them expressly. The definition of “excluded shares” in subsection 120.4(1) excludes shares of a “professional corporation.” Subsection 248(1) defines a professional corporation as one carrying on the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor. This exclusion alone is decisive.
They fail the services test. Excluded shares also require that less than 90% of the corporation’s business income come from providing services. A clinical practice earns substantially all its income from services.
Most family members can’t meet the voting test. In Ontario, family members who are not themselves members of the college can hold only non-voting shares.

Because of the first point, no reorganization of the share capital can bring a medical or dental professional corporation within this exception.

The excluded business exception: the 20-hour rule

This is the most useful remaining exception for practice families.

The rule. Income is excluded from TOSI if it is derived from an “excluded business” of the recipient. An excluded business is one in which the recipient was actively engaged on a regular, continuous and substantial basis, either in the current year or in any five previous taxation years. The exception is available to individuals aged 18 or older.

The deeming provision. Subsection 120.4(1.1) deems an individual to meet the test for a year if they work in the business an average of at least 20 hours per week during the part of the year the business operates. This is a statutory rule, not an administrative concession. Working fewer hours does not automatically fail the test, but the result then depends on the facts.

The five-year lookback. The five years do not need to be consecutive. Once a family member has met the test for any five prior years, income derived from that business continues to be excluded for them under the current rules, even after they stop working there. The exclusion is specific to that business. It is not a blanket exemption for all future corporate income.

To safely rely on the 20-hour rule, practice owners must remember that the burden of proof rests entirely on the taxpayer, not the Canada Revenue Agency (CRA). Defending dividend distributions against TOSI requires detailed, contemporaneous documentation created at the exact time the work is performed—such as itemized timesheets, calendar logs, written job descriptions, and matching payroll records. Attempting to retroactively reconstruct work hours years after the fact during a CRA audit is routinely rejected by both tax auditors and the Tax Court of Canada as unreliable evidence, leaving otherwise legitimate family earnings exposed to top-bracket penalty taxes.

How it works in practice:

A spouse who manages the office will generally qualify if they handle billing, scheduling, HR, bookkeeping or supplier relationships for an average of at least 20 hours a week.
An adult child can qualify on the same test. Summer-only work usually falls short, because the average is measured over the practice’s full operating period.
Records matter. Keep payroll or time records, a written job description, and evidence of real responsibilities such as correspondence, system access and signed documents. Without them, even genuine involvement can be difficult to substantiate.

Exceptions for adults aged 25 and older

Two TOSI exceptions depend on the recipient having turned 24 before the start of the year.

Excluded shares. As explained above, this exception is unavailable for professional corporations.

Reasonable return. An amount is excluded to the extent it is a reasonable return, having regard to the relative contributions of the recipient and of related persons to the business. The factors are:

work performed;
property contributed;
risks assumed, such as personally guaranteeing the practice’s financing or clinic lease;
total amounts paid or payable to them;
any other relevant factors.

CRA has said it generally does not intend to substitute its own judgment where a taxpayer has made a good-faith attempt to apply these criteria. Even so, this is the most fact-dependent exception and the least predictable. It can support a proportionate dividend to a spouse who funded the practice’s start-up, guaranteed its debt, or contributed meaningful work below the 20-hour threshold. It cannot support a large dividend to a family member with little involvement. Document the contribution when it is made, and connect the dividend amount to it.

Exceptions for adults aged 18 to 24

Besides the excluded business exception, two capital-based exceptions apply at these ages. They are separate tests.

Safe harbour capital return. This is a formula amount: the prescribed interest rate applied to the fair market value of property the individual contributed in support of the business, subject to the statutory exclusions.
Reasonable return on arm’s length capital. This is a reasonable return measured only by the individual’s contributions of arm’s length capital, and it is not capped at the prescribed rate. Arm’s length capital excludes borrowed funds, property derived from a related business, and most property transferred from related persons. Inherited property is treated differently.

In practice, these exceptions are often of limited use in a practice family, because an 18- to 24-year-old usually has little qualifying capital invested in the business.

The age-65 rule

An amount received by a practitioner’s spouse or common-law partner is excluded from TOSI if two conditions are met:

the practitioner turned 64 before the start of the taxation year, so the rule is available for the whole year in which they turn 65; and
the amount would have been excluded if the practitioner had received it directly.

For a physician or dentist actively engaged in the practice, the second condition is generally met. The receiving spouse does not need to be 65, and the practitioner does not need to be retired.

Where shares pass on death, the recipient can generally rely on the deceased’s TOSI position in applying the exceptions. Estate planning should account for this.

For practitioners in their late 50s and early 60s, the planning question is how to accumulate retained earnings in the corporation so they can be paid to both spouses from the year the practitioner turns 65.

Minors and trusts

Minors’ split income was subject to TOSI (often called the “kiddie tax”) well before 2018; the 2018 changes extended the rules to adults. Ordinary dividends from a practice to a child under 18, paid directly or through a trust, are subject to TOSI.

A trust for minor children therefore does not allow annual splitting of practice dividends. It can still matter in two ways:

Capital gains. The exclusion for taxable capital gains on qualified small business corporation shares can apply to a minor, including a gain allocated through a trust. This is subject to a special rule that treats certain non-arm’s length dispositions by minors as dividends.
Inherited property. The inherited property exceptions may apply.

Trusts also carry compliance costs, including T3 filings and beneficial ownership reporting where required.

Alternatives and related planning

Salary instead of dividends. Salary is not split income. A professional corporation can pay a family member a salary for work actually performed, but under section 67 it can deduct only an amount that is reasonable, in practice comparable to what an unrelated employee would be paid. Salary also creates RRSP contribution room and, where pensionable, CPP contributions and benefits. For a family member who works in the practice below the 20-hour average, salary is often the cleaner approach.

Capital gains on a share sale. Taxable capital gains on dispositions of qualified small business corporation shares are generally excluded from TOSI for adults. That exclusion is itself a TOSI exception, not an alternative to one.

On a share sale of a practice, each family shareholder may be able to claim their own lifetime capital gains exemption, which is $1,275,000 for 2026. This is possible, not automatic:

each person needs a qualifying gain and unused exemption room;
the shares must meet the holding-period and asset tests, and significant investments held inside the corporation can cause the asset tests to fail;
separately from the tax rules, the buyer of professional corporation shares must be eligible to own them, which in practice means a member of the same college.

The corporate tax deferral. Qualifying active business income up to the $500,000 small business limit is taxed at a combined federal and Ontario rate of 11.2% for periods after June 30, 2026. Ontario reduced its small business rate from 3.2% to 2.2% on July 1, 2026, and prorates the rate for taxation years that straddle that date. A corporation with a December 31 year-end pays a blended rate of about 11.7% for 2026. The resulting tax deferral on income retained in the corporation remains an important potential advantage of incorporation and does not depend on having family shareholders.

The passive income limit. The federal small business limit is reduced by $5 for every $1 of adjusted aggregate investment income above $50,000. The test uses the corporation’s taxation year ending in the preceding calendar year and includes associated corporations. At $150,000 of such income, the federal limit is eliminated. Ontario does not apply the same reduction to its own small business rate.

The 2027 dividend tax credit change. Ontario is reducing its non-eligible dividend tax credit effective January 1, 2027, alongside the small business rate cut. This will generally increase Ontario personal tax on non-eligible dividends. Practitioners planning significant dividends should consider, with advice, whether to pay them before December 31, 2026.

Non-tax risks of family shareholders

Separation and divorce. Shares held by a spouse are part of any family law property analysis. The articles or a shareholder agreement should say what happens to the shares if the shareholder stops being an eligible shareholder, and should fix a valuation method in advance.
Regulatory compliance. Share issuances and transfers must comply with the ownership requirements, and voting shares must remain with college members. Non-compliance can put the corporation’s certificate of authorization at risk.
Estate planning. A secondary will in Ontario can reduce estate administration tax on professional corporation shares, but only where those assets can be administered without an estate certificate for that will. Naming a will “secondary” does not create the saving by itself. The share structure and the wills should be designed together.

So, is it still worth it?

It can be, but only where the facts support an exception and the share structure is sound on attribution and regulatory grounds.

Income splitting may still be available when:

a spouse or adult child works in the practice an average of at least 20 hours per week, or has done so for five earlier years;
the practitioner is in or past the year they turn 65, and the amount would have been excluded in their hands;
a family member 25 or older has made real contributions that support a reasonable return;
a share sale is realistic, and family members have qualifying gains and unused exemption room.

It is generally unavailable or of limited benefit when:

family shareholders have no real involvement in the practice;
the recipients are minor children;
the plan depends on a thinly supported reasonableness argument.

In those cases, family shareholdings mostly add complexity and family law exposure.

This article provides general information about Ontario and federal tax law as of the date above. It is not legal or tax advice. TOSI and attribution outcomes depend on specific facts; consult a lawyer or tax advisor about your circumstances.

Shahriar Jahanshahi is the founder of Jahanshahi Law Firm in Toronto. He advises owner-managed businesses and incorporated professionals on corporate reorganizations, estate freezes, family trusts, shareholder agreements, and the purchase and sale of businesses. To discuss your professional corporation, contact him at 416-551-1569 or by email at info@jahanlaw.ca.