📄 Line 40424 – Federal Tax on Split Income (TOSI)

Line 40424 of the Canadian personal income tax return is used to report the federal tax on split income (TOSI). This special tax applies to certain types of income earned by children under 18 and by adults receiving income from a related business.

🔗 Official source: CRA – Line 40424 Federal tax on split income

📌 What Is Tax on Split Income (TOSI)?

Tax on split income (TOSI) is a Canadian tax rule designed to prevent income shifting within families to reduce taxes. It ensures that certain income earned through family relationships or private businesses is taxed at higher rates instead of benefiting from lower personal tax brackets.

TOSI applies to:

• 👶 Certain income received by children under 18
• 👨‍👩‍👧 Adults receiving income from a related business
• 📊 Income distributed through family corporations, partnerships, or trusts

When TOSI applies, the income is taxed at a special rate calculated separately from regular income tax.

💰 Types of Income That May Be Subject to TOSI

The following types of income may be considered split income:

• 📈 Dividends from private corporations
• 💼 Partnership income allocated to family members
• 🏢 Income from a family-owned business
• 📊 Certain trust income distributions
• 💵 Shareholder benefits

These rules are mainly aimed at preventing income sprinkling, where business owners distribute profits to family members to lower overall taxes.

🧮 How to Calculate TOSI

To calculate the tax on split income, you must complete:

• 📑 Form T1206 – Tax on Split Income

The calculated amount is then reported on line 40424 of the tax return and included in the individual’s federal and provincial tax calculations.

If you are filing a paper return, you must attach the completed Form T1206 to your return.

📊 Interaction With Provincial Taxes

If TOSI applies, you may also need to calculate the corresponding provincial or territorial tax.

For example:

• Complete the provincial section of Form T1206
• Enter the calculated provincial tax on line 42800 of your return

This ensures both federal and provincial taxes are applied correctly to split income.

🎯 Tax Credits That Can Reduce TOSI

Even when TOSI applies, certain tax credits can reduce the amount of tax payable, including:

• ♿ Disability tax credit
• 📊 Dividend tax credit
• 🌍 Foreign tax credit

These credits may lower the final tax owed on split income depending on the individual’s situation.

🧾 Reporting Split Income on Your Tax Return

When preparing your return:

1. Report the income on the appropriate income lines (such as dividends or partnership income).
2. Calculate TOSI using Form T1206.
3. Enter the result on Line 40424 of your federal return.
4. Include any related provincial tax calculations if required.

In some cases, a deduction for this income can be claimed on line 23200 to properly calculate net income.

⚠️ Common Situations Where TOSI Applies

• Family-owned corporations paying dividends to adult children
• Income allocated through family partnerships
• Trust distributions involving related businesses
• Investment income from private companies owned by relatives

Because the rules are complex, professional tax advice is often recommended for family businesses.

🔎 Related CRA Forms and Resources

• Form T1206 – Tax on Split Income
• Form T2203 – Provincial and Territorial Taxes for Multiple Jurisdictions
• CRA Taxes – Individuals

📚 Summary: Line 40424 is used to report the federal tax on split income (TOSI), a special tax designed to prevent income splitting within families through private businesses. The tax is calculated using Form T1206 and added to the individual’s total federal tax liability.