Does a Family Trust Still Save Tax After TOSI? An Honest Answer for Physicians and Dentists

Family trusts were sold to business owners for one reason above all: income splitting. A company paid dividends to the trust, the trustees allocated them to a spouse and children with lower incomes, and the same dollars were taxed at lower rates. Two sets of rules now stand in the way. The attribution rules send income from property you give or lend to a spouse or minor child back to you. The tax on split income, known as TOSI, has taxed most family business income received by minors at the top rate since 2000, and was extended to adult family members in 2018.

For an Ontario medicine or dentistry professional corporation, there is a step before either rule: a standard family trust cannot own the corporation's shares at all. This post is about a trust that holds something else, such as a separate company that owns your clinic building or provides management services, an investment portfolio, or a trust your family already has. It is orientation, not advice: your accountant and lawyer decide what applies to your family.

The short answer

How trust income is taxed now depends on who receives it and where it comes from:

A properly structured fair-market-value sale or prescribed-rate loan can prevent spouse and minor attribution when the statutory conditions are met, which changes the right-hand column. It does not change the middle column.

Rule one: the tax on split income

TOSI applies the top personal tax rate to "split income": dividends from private companies, and amounts a trust allocates that come from them or from another business connected to the family, which the rules call a related business. A company that owns your clinic building or provides management services to your practice is usually a related business. The Canada Revenue Agency's own guidance includes an example of a dividend that passes from an operating company through a holding company and a family trust to a child, and treats it as split income.

The exceptions depend on age and on what the family member contributes:

• Genuine work in the business. From the year they turn 18, a family member who is actively engaged in the business on a regular, continuous and substantial basis, in the year or in any five earlier years, is excluded. An average of at least 20 hours a week during the part of the year the business operates is deemed to meet that test.
• A reasonable return, from 25. From the year they turn 25, income that is a reasonable return on the family member's own contributions of work, capital and risk can be excluded.
• A return on their own capital, from 18 to 24. From the year they turn 18 through the year they turn 24, two narrower exclusions apply, both limited to capital they contributed that did not come from the family or the business: a safe-harbour return of up to the prescribed rate on that capital, and a reasonable return on it.
• Excluded shares. From the year they turn 25, dividends on shares that the family member owns, carrying at least 10 percent of the votes and value, can be excluded. The shares must be owned by the family member, so dividends that reach a beneficiary through a trust do not qualify. It is never available for a professional corporation or a company earning 90 percent or more of its business income from services.
• A spouse once you turn 65. From the year you turn 65, income your spouse receives can be excluded if it would also have been excluded in your own hands.
• Capital gains on a qualifying sale. Taxable capital gains on qualified small business corporation shares are excluded, except where a minor's gain on private company shares is treated as a dividend.

The salary vs dividends guide covers how these exceptions apply to family members who own shares of a professional corporation directly.

Rule two: the attribution rules

The attribution rules are older than TOSI, and they apply whenever you give or lend property to certain family members, including through a trust:

• Spouse. Income from property you transfer or lend to your spouse, or to a trust for your spouse, and capital gains on that property, are generally taxed to you.
• Minors. Income such as interest and dividends from property you transfer or lend to, or for the benefit of, a child, grandchild, niece, nephew or other related minor is taxed to you until the year they turn 18. Capital gains are not attributed for minors.
• The reversionary trust rule. If property you contributed to a trust can come back to you, if you can decide after the trust is created who receives it, or if it cannot be sold without your consent, all of its income and gains can be taxed to you, whoever the beneficiaries are. Who contributes the property and who controls the trust matter for that reason.
• Corporate attribution. If you transfer or lend property to a company and one of the main purposes is to reduce your income and benefit your spouse or minor child, including through a trust, you can be treated as receiving interest at the prescribed rate each year. It does not apply while the company is a small business corporation, or where the trust's terms prevent those family members from benefiting while the rule would otherwise apply.

A properly structured fair-market-value sale or prescribed-rate loan can prevent spouse and minor attribution when the statutory conditions are met. The price must be at least the property's fair market value. Any part paid with a promissory note, and any loan, must carry interest at least at the prescribed rate in effect when the debt arises (or an arm's-length rate, if lower), 3 percent in the third and fourth quarters of 2026, and the interest for each year must be paid by January 30 of the following year. Miss one payment and attribution applies from then on. A transfer to your spouse, or to a trust that qualifies for the spousal rollover, generally also needs an election out of that rollover. These exceptions address the spouse and minor attribution rules only: the reversionary trust rule, corporate attribution and TOSI each need to be dealt with separately.

The classic example, corrected

Family trust training material often uses this example. A parent owns all the shares of a profitable company and gives them to a family trust with a minor child as a beneficiary. The company pays a dividend to the trust, and the trustees allocate it to the child. The usual conclusion is that the dividend is attributed back to the parent and taxed at the parent's rate.

Today the result is different, and no better:

1. The gift is taxed on the way in. Giving existing shares to a trust is treated as selling them at fair market value, so the parent pays capital gains tax on any accrued value and no longer owns the shares.
2. The dividend is taxed at the top rate on the child's return. A private company dividend allocated to a child under 18 is split income. The attribution rules and the reversionary trust rule do not apply to an amount already taxed as split income, so the dividend stays on the child's return and is taxed at the top rate there. That costs at least as much as attribution to the parent would have, because no one's rate is higher than the top rate.
3. For a professional corporation, the structure is not available at all. A standard family trust cannot hold the shares of an Ontario medicine or dentistry professional corporation.

The lesson of the example still holds: paying income to a beneficiary does not guarantee that the beneficiary is taxed at their own rates.

Ways around attribution, and what they do not fix

Two techniques are commonly used to avoid attribution. Both need to be designed by your accountant and lawyer:

• Issue new shares to the trust instead of transferring existing ones. When a company is set up or reorganized, often in an estate freeze, the trust subscribes for new shares for a small amount, using money that did not come from you. That avoids a transfer by you and the gain on the way in. Corporate attribution and the reversionary trust rule still need attention, and it does nothing about TOSI: dividends from the company to family members are still split income unless an exception applies.
• A properly structured fair-market-value sale or prescribed-rate loan. It can prevent spouse and minor attribution when the statutory conditions are met, but it does not remove TOSI on family business income.

Where the prescribed-rate loan still works is investment income. If you lend money to a family trust at the prescribed rate, the trust invests it in publicly traded investments rather than a family business, and the statutory conditions are met, the return above the interest the trust pays you is generally taxed to the beneficiaries at their rates. That income does not come from a related business, so TOSI does not reach it.

What a family trust can still do

Each of these still requires the attribution rules to be dealt with. A TOSI exception on its own does not mean income is taxed at the beneficiary's lower rates.

• Pay family members who genuinely work in the business. For a company the trust can own, income to a family member who meets the 20-hour test can still be taxed at their own rates.
• Pay a spouse once you turn 65, where the income would have been excluded for you.
• Multiply the lifetime capital gains exemption on a qualifying sale. A gain on qualified small business corporation shares can be allocated to several beneficiaries, each claiming their own exemption, and these gains are outside TOSI, except where a minor's gain is treated as a dividend because the shares go to a non-arm's-length buyer. A beneficiary who claims a large exemption can owe alternative minimum tax. This works only for shares the trust can own, not those of your professional corporation.
• Split income from publicly traded investments, through a properly structured prescribed-rate loan, and capital gains for minors on growth investments, provided the reversionary trust rule does not apply.
• Freeze share value and shift future growth outside your estate. In an estate freeze of a company that is not a professional corporation, the current value of your shares is locked into fixed-value shares, and future growth accrues to new shares, often held by the trust. It fixes the value of your shares, not your future tax bill: the frozen shares are still taxed when you die or they are redeemed, and the trust's growth shares face the 21-year rule.
• Meet goals that are not about tax: control over who receives what and when, succession, and some separation from creditors, within limits. The family trusts guide covers each of these.

The costs on the other side

• Set-up and annual legal and accounting fees.
• An annual T3 return with a schedule reporting every settlor, trustee and beneficiary, unless an exemption applies. A trust whose assets stay at $50,000 or less throughout the year is exempt whatever it holds, but private company shares rule out the separate $250,000 exemption for small family trusts. An exemption removes only that annual reporting duty: a trust that has tax payable, disposes of capital property, or distributes or allocates income above small thresholds, among other triggers, still files an ordinary T3 return.
• Top-rate tax on income kept in the trust: 53.53 percent on ordinary income such as interest in 2026, and the top rates for dividends and capital gains it keeps.
• A December 31 year-end, and losses that stay in the trust.
• The 21-year rule, which taxes the trust's accrued gains on its 21st anniversary.
• Records to support any TOSI exception, such as hours worked in the business.

Questions for your accountant and lawyer

1. What does our trust hold, and is any of its income from a business connected to our family?
2. Which beneficiaries meet a TOSI exception this year, and how is that documented?
3. Did any of the trust's property come from me or my spouse, and was it a gift, a loan or a sale?
4. Could any property return to me, or does it need my consent to be sold?
5. When does the trust turn 21, and what is the plan for that date?
6. What would winding the trust up cost, compared with keeping it?

For the wider plan once the trust question is settled, from how you pay yourself to how the corporation invests, the financial planning for physicians and financial planning for dentists pages explain how I work with each profession.

I do not set up or wind up trusts; that is your lawyer's and accountant's work. This post is orientation, so the honest version of the trust conversation, the one that includes what TOSI took away, reaches the people who can act on it.