Income splitting can be more complicated for Canadian dentists than it once was. Since the introduction of the tax on split income (TOSI) rules, many payments to spouses and other family members can be taxed at the highest marginal tax rate. 

For dentists with professional corporations, this means that simply paying dividends to a lower-income spouse or family member may not produce the expected tax benefit. However, the TOSI rules include several exclusions, and other income-splitting strategies may still be available depending on the circumstances.

Understanding how these rules apply can help dentists determine which approaches may be appropriate for their family and dental corporation.

What the TOSI Rules Changed for Dentists

TOSI applies to certain types of income received by family members from a related business, including certain dividends and other investment income. When TOSI applies, the affected income is generally taxed at the highest marginal tax rate, which can eliminate much of the intended tax benefit of income splitting.

The rules include several exclusions, and which ones are available depends on factors such as the recipient’s age, their involvement in the business, and their contributions to it.

The Excluded Shares Exclusion Generally Doesn’t Apply to Dental Professional Corporations

For some private corporations, an individual aged 25 or older may qualify for the excluded-shares exception if they own at least 10% of the corporation’s votes and value and the corporation meets the other requirements.

However, this exclusion does not apply to a professional corporation or a corporation where 90% or more of its business income comes from providing services. The rules specifically include professional corporations carrying on the practice of dentistry among the corporations excluded from this exception.

As a result, a passive family shareholder in a dental professional corporation generally cannot rely on the excluded-shares exception simply by holding shares.

Other exclusions may still be available, including the excluded-business and reasonable-return rules, depending on the family’s involvement and contributions.

Income-Splitting Strategies That May Still Work

Pay a Reasonable Salary to a Family Member

TOSI does not apply to salary or employment income. A family member who performs genuine work for the dental corporation can therefore receive employment income without that income being subject to TOSI.

The salary must be reasonable for the work performed. The family member should have genuine responsibilities and be paid an amount that can reasonably be supported by the duties involved.

For example, a spouse may perform responsibilities such as:

  • Reception and administrative work
  • Bookkeeping
  • Billing
  • Marketing
  • Human resources
  • Ordering and office management

Good documentation is important. Keep records of the person’s role, hours worked, duties performed, and compensation.

Salary may also create RRSP contribution room and CPP participation for the family member, depending on the circumstances.

Use the Excluded-Business Exception

TOSI may not apply to amounts received from a related business when the family member is actively engaged in the business on a regular, continuous, and substantial basis.

One of the clearest ways to meet this test is to work an average of at least 20 hours per week during the portion of the year when the business operates. The five-year rule can also be relevant: qualifying involvement in any five prior taxation years may support the excluded-business exception.

This can be relevant when a spouse genuinely works in the dental practice, such as in a practice-management or administrative role.

Simply helping occasionally is not the same as being actively engaged in the business. Keep contemporaneous records such as timesheets, schedules, or payroll records to support the hours worked if the exclusion is being relied upon.

Consider the Age-65 Spousal Exclusion

The TOSI rules include a retirement-related exclusion for certain income received by a spouse when the spouse who contributed to the related business has reached age 65.

This can become particularly relevant as a dentist approaches retirement and begins planning how corporate income and retirement income will be distributed between spouses. The rules are specific, however, so the age-65 exclusion should be considered alongside the dentist’s corporate structure, business involvement, and other retirement-income strategies.

Consider a Prescribed-Rate Loan

A prescribed-rate loan can be another income-splitting strategy in certain circumstances.

For example, an individual may lend after-tax personal funds to a spouse or family trust at the CRA’s prescribed interest rate. If the arrangement meets the applicable requirements, investment income earned on the borrowed funds may be taxed to the borrower rather than the lender.

The interest requirements are important. Interest generally needs to be paid within 30 days after the end of each calendar year to preserve the intended tax treatment.

Because prescribed rates change over time, the economics of this strategy should be reviewed before implementing it. It also needs to be structured carefully to avoid attribution and TOSI issues.

Don’t Overlook Other Tax-Planning Tools

Income splitting isn’t limited to dividends from a dental corporation. Depending on the family’s circumstances, other tax planning strategies may also help distribute income or build retirement assets more efficiently.

These can include:

  • Spousal RRSP contributions
  • Pension income splitting
  • Using available TFSA contribution room
  • Structuring personal and corporate investments appropriately

Each strategy has its own rules and should be considered as part of the family’s overall tax and financial plan.

Where Dentists Get Caught

Provincial rules add a second layer. In Ontario, for example, only RCDSO members can hold voting shares of a dentistry professional corporation. Non-voting shares can be held by a spouse, child or parent, and holding companies can’t hold shares at all.

That means your corporate structure can be perfectly legal under college rules and still deliver zero tax benefit under TOSI. The two systems have to be planned together.

The other common trap is retroactive documentation. TOSI exclusions turn on facts — hours worked, duties performed, capital contributed. If those facts aren’t recorded contemporaneously, they’re difficult to defend.

What Dentists Should Know About Income Splitting

Income splitting for dentists in Canada is more restricted than it was before the TOSI rules, but it has not disappeared completely.

Depending on the circumstances, strategies involving reasonable salaries, an actively engaged spouse, the age-65 exclusion, prescribed-rate loans, and registered retirement plans may still have a place in a dentist’s overall tax plan. Simply paying dividends to a passive family shareholder, however, may result in TOSI applying.

The right approach depends on your corporate structure, your family’s involvement in the practice, and where you are in your career.

Dental Tax specializes in tax planning and accounting for dentists across Canada. A review of how your family is compensated and how your dental corporation is structured can help identify opportunities while keeping your planning aligned with the applicable rules. Get in touch today.