Paying Your Spouse or Children: Salary, Dividends and TOSI

Can I pay my spouse or children a salary and deduct it?

Yes. A Canadian sole proprietor, partnership or corporation can generally deduct reasonable wages paid to a spouse or child for work needed by the business. The family member must actually do the work, and the business needs proof of the pay. The CRA's family-wage guidance expressly applies the same test to children and spouses.

The same family-wage test applies across these business structures. If your spouse or child is a partner, their share of partnership profit is not employee wages; partner pay is not deductible as wages. For the owner's own pay, see Salary or dividends and How self-employed income is taxed.

How much can I pay a family member?

Pay what the work is worth, taking account of duties, hours, skill and the family member's age. There is no special family-wage allowance or flat amount: section 67 of the Income Tax Act limits a deduction to what is reasonable in the circumstances, and the CRA asks whether you would pay someone else the same amount.

Before choosing the rate, write down the tasks and expected hours. Compare the rate with what you would pay an unrelated worker for those tasks. Keep the comparison with time records and proof of payment; a family relationship alone does not justify a higher wage.

What if a family member does not really work in the business?

Do not record a family member's allowance or share of profits as deductible salary if they do not perform the work. The CRA's test requires work necessary to earn business income, reasonable pay and evidence that the salary was paid. An unsupported deduction may be denied.

A corporation may pay a dividend to a family member who owns shares with dividend rights without that person working in the business. The dividend is a return on shares, not pay for services; TOSI may still apply. Moving money to a relative without a wage or valid dividend can raise a different shareholder-benefit question; see the CRA's distinction.

Do I deduct CPP, EI and income tax from a family member's pay?

Treat a family employee's wages as payroll. Related status does not remove income-tax withholding. CPP or Quebec Pension Plan contributions apply when the employment is pensionable, although a spouse's or common-law partner's employment is excepted from CPP if their pay is not deductible under the Income Tax Act. EI can apply to a related employee if CRA finds that an unrelated worker would have been hired on similar terms (CRA: related employees).

For Quebec employment, QPIP premiums can also apply, and employers must issue an RL-1 slip for wages.

The CRA's CPP guidance gives the age condition. If EI or CPP status is uncertain, the employer or worker can request a CPP/EI ruling by June 29 of the following year. For account setup, calculations and remittances, see Running payroll.

Does TOSI apply to a salary I pay my family?

No. Salary is outside the Income Tax Act's split-income definition, and the CRA confirms that section 120.4 does not apply to salary. The ordinary wage rules still apply: the work must be real, the deduction reasonable, and payroll handled correctly.

Can my corporation pay dividends to my spouse or adult children?

Yes, if the spouse or child owns shares entitled to the dividend and the corporation declares it under those share rights. The corporation must also meet its governing law's dividend restrictions; federal law bars a dividend when either solvency test fails. A sole proprietorship or partnership has no shares from which to pay dividends. The CRA describes dividends as returns on shareholders' investment, not pay for services.

A dividend does not become a deductible wage because the shareholder worked in the business. The corporation should document the share class, dividend declaration and payment, and check whether a T5 slip is required. For a Quebec-resident individual, also check the RL-3 slip. The recipient then tests the dividend against TOSI; family ownership by itself does not create an exception.

If the shareholder is non-resident when paid, the corporation generally must withhold Part XIII tax and report the dividend on an NR4 slip; a tax treaty may reduce the withholding. TOSI depends on the recipient's residence at year-end or just before death.

Which TOSI exceptions let family dividends be taxed at their own rates?

An adult's family-business dividend can escape TOSI if it meets an excluded-amount rule. The TOSI rules cover a recipient resident in Canada at year-end (or just before death); for a child under 18 at year-end, a parent must also have been resident in Canada during the year. The tests below are alternatives, and ages are measured at the end of the tax year, not when the dividend is paid. Otherwise, section 120.4 applies the highest individual federal rate to split income. Form T1206 calculates federal and provincial or territorial TOSI; outside Quebec, provincial or territorial tax generally goes on Form 428, or on Forms T2203 and 428MJ when income is taxed in multiple jurisdictions.

The statute sets the work, capital, ownership and spousal conditions. A professional corporation, or one whose service revenue reaches 90% of gross business revenue, fails the excluded-shares test even if the shareholder meets the ownership threshold. Another exception may still apply. Spouses living apart at year-end because their relationship broke down are deemed unrelated for TOSI. Quebec residents should also check Revenu Québec's split-income form.

Can I pay dividends to children under 18?

A corporation may pay a dividend to a child who validly owns shares with dividend rights. If the child is under 18 at the end of the tax year, an ordinary family-company dividend will generally be split income, subject to narrower statutory exclusions. Selling certain private-company shares to a non-arm's-length person can also turn the minor's gain into a dividend for TOSI. A child who turns 18 during the year may qualify for the adult excluded-business route if the work test is met.

Pay for real work is a separate option: a minor can receive reasonable wages without TOSI, subject to the ordinary payroll rules. Giving shares or other property to a child can bring separate attribution or transfer rules; see Transferring property to family.

What records should I keep?

Keep records that prove both the type of payment and the facts behind its tax treatment. The CRA requires enough detail to verify tax obligations and entitlements, generally for six years from the end of the last tax year they relate to.

For a child paid in cash, the CRA specifically calls for a signed receipt. Keep the wage and dividend records separate so the payment's purpose is clear.

Example

Illustrative Canadian-dollar amounts, with no tax calculation. A corporation owned and run by a Canadian-resident parent pays their Canadian-resident 26-year-old shareholder-child C$16,000 for 800 hours of necessary work at C$20 an hour, comparable with unrelated staff. It keeps timesheets and proof of payment. The reasonable wages may be deductible and are outside TOSI. The business operates for 40 weeks, and the child works 20 hours in each of those weeks. A C$10,000 dividend on the child's shares can meet the excluded-business rule because the child meets the hours test in the year. The corporation still has to declare and record the dividend, and the child reports it as dividend income.

Different for you?

• The family member owns shares in a professional corporation: ownership and the TOSI excluded-shares route need separate review. See Professional corporations.
• You transferred property or shares to a spouse or child: attribution and transfer rules may change who reports the income. See Transferring property to family.
• A family shareholder borrowed from the corporation: a loan is not automatically salary or a dividend. See Shareholder loans.
• You have a family trust, past family dividends or a CRA review: the TOSI facts and records need individual review. Bring the share register, declarations, ages, work and pay records to bookkeeping support.
• You are hiring children in a US business: US payroll and deduction rules differ. See Hiring your children in the US.