Issuing Shares to Family Members: Tax Rules to Avoid Attribution and TOSI — CPA Firm Near You, Montreal

Introduction

Many Quebec business owners want to issue shares to spouses or adult children to reduce taxes, transfer wealth, or prepare for future succession. But issuing shares to family members is heavily regulated under Canada’s Tax on Split Income (TOSI) rules and attribution rules. A poorly structured share issuance can trigger punitive tax rates, denied deductions, capital gains attribution, or reassessments. This guide explains how to issue shares to family members properly, how TOSI applies, and how a CPA near you in Montreal can help structure the plan correctly.

Legal and Regulatory Framework

Under the Income Tax Act, shares issued to family members must comply with attribution rules and TOSI. Attribution rules prevent shifting income to spouses or minor children by automatically reassigning taxable income back to the original taxpayer. TOSI applies punitive tax rates to dividends received by certain family members unless they qualify for an exemption such as excluded shares, excluded business, labour contribution, capital contribution, or age-based exemptions (spouses of owners 65+). Corporate law under the QBCA or CBCA requires that any issuance of shares be documented with resolutions, updated share registers, amended articles (if new share classes are required), and proper minute book entries.

Key Court Decisions

Courts have ruled that dividends paid to family members through artificial structures are subject to TOSI. Judges confirmed that family members must either contribute labour, invest capital, or hold excluded shares to avoid punitive taxation. Several decisions denied tax benefits where share issuances lacked proper documentation, where valuations were inaccurate, or where structures lacked economic substance. Courts emphasize that issuing shares to minors or non-active spouses often triggers attribution or TOSI unless exceptions are satisfied.

Why CRA and Revenu Québec Scrutinize Family Share Issuances

Issuing shares to family members is a known tax planning technique. CRA looks for whether family members contributed to the business, whether shares qualify as excluded shares under TOSI, whether dividends match labour or capital contributions, whether valuation was performed correctly, and whether the issuance was properly documented. Revenu Québec examines minute books, share registers, and resolutions for legal compliance. Improper structures raise audit risk and can lead to reassessments.

How to Issue Shares to Family Members Without Triggering Attribution or TOSI

Use excluded business rules

Family members who work an average of 20 hours per week in the business can receive dividends free from TOSI.

Use excluded shares rules

Shares that are not professional corporations and where the family member owns at least 10% of votes and value may qualify.

Use age 65+ exception

Dividends paid to a spouse of an owner aged 65+ may bypass TOSI.

Rely on capital contributions

Family members who invest capital at fair market value may receive dividends without attribution.

Use a family trust

A trust can hold shares and allocate income strategically, but TOSI must still be considered.

Consider growth shares

New common shares with nominal value can be used for long-term planning without shifting existing value.

Critical Documentation Steps

Corporate resolutions

The board must approve issuing shares and document the details.

Updated share registers

Registers must show issuance date, number of shares, and shareholder information.

Share certificates

Physical or digital certificates must be issued.

Fair market value valuation

The corporation must justify the value assigned to shares issued.

Minute book updates

All records must be stored and updated for legal compliance.

Common Pitfalls

Issuing shares at undervalued prices

This creates shareholder benefits or deemed dividends.

Paying dividends to inactive family members

This triggers TOSI and punitive tax rates.

Ignoring attribution rules for minors

Income may be reassigned back to the parent.

Missing documentation

CRA and RQ may deny tax positions or reverse transactions.

Failing to create proper share classes

Non-voting or preferred shares may be needed to structure allocations correctly.

Mackisen Strategy

At Mackisen CPA Montreal, we structure family share issuances to comply with TOSI and attribution rules, create proper share classes, prepare resolutions, update minute books, perform valuations, and design long-term income-splitting and succession plans. We ensure legal compliance and tax efficiency while minimizing audit risk.

Real Client Experience

A Montreal contractor issued growth shares to adult children without documentation. CRA challenged the dividends and applied TOSI. We reconstructed all records, demonstrated labour involvement, and reversed penalties. Another client issued shares to a spouse without valuation; we corrected the structure with excluded-share rules and compliant documentation.

Common Questions

Can I issue shares to my spouse to split income?

Yes, but only when TOSI exemptions apply.

Are dividends to adult children always subject to TOSI?

Not if they work in the business, own excluded shares, or invest capital.

What if I issue shares to minors?

Attribution rules will generally apply, making income taxable to you.

Do I need a valuation?

Yes, if shares have value or if a freeze is involved.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal structures share issuances that avoid TOSI, comply with attribution rules, and support long-term family tax planning. We ensure documentation, valuation, and legal compliance at every step.