Jessica owns a small consulting firm incorporated in Canada. She is the sole shareholder and employee, drawing a salary of $80,000 annually. She also takes out $50,000 in eligible dividends from the corporation. For the purposes of Tax on Split Income (TOSI), how will these dividends be treated (assuming no other income splitting arrangements)?

Question: Jessica owns a small consulting firm incorporated in Canada. She is the sole shareholder and employee, drawing a salary of $80,000 annually. She also takes out $50,000 in eligible dividends from the corporation. For the purposes of Tax on Split Income (TOSI), how will these dividends be treated (assuming no other income splitting arrangements)?

Answer options:

• The $50,000 in dividends will be subject to the highest marginal tax rate due to TOSI rules. ✅ The $50,000 in dividends will be taxed as regular eligible dividends in her hands, not subject to TOSI.
• Only the portion of dividends exceeding a reasonable return on capital will be subject to TOSI.
• Since her salary is less than the dividends, all dividends will be subject to TOSI.

Correct answer: The $50,000 in dividends will be taxed as regular eligible dividends in her hands, not subject to TOSI.

Explanation: Jessica's dividends from her own active business, where she is actively engaged and receives reasonable compensation (her salary), are generally excluded from 'split income' definitions for TOSI purposes. She is not a connected person to a 'related business' of a 'specified individual' in a way that TOSI would apply (e.g., an adult family member receiving dividends without reasonable contribution).