Can my corporation pay my spouse or children?
Yes. A corporation can pay a family member a salary, and it can pay dividends to family members who own shares. Each route has its own test. A salary has to match real work at a fair rate. A dividend to a family member often falls under the tax on split income (TOSI) rules, which tax it at the top personal rate unless an exception applies. Most problems we see come from paying family first and asking about the rules later.
How does paying a family member a salary work?
The family member becomes an employee of the corporation, the same as anyone else on payroll. The corporation can deduct the pay as long as it is reasonable for work that was actually done. The CRA looks at what you would pay an unrelated person for the same hours and duties. A spouse who runs the books three days a week can earn what a part-time bookkeeper earns. A spouse who does no work for the company can't be put on salary just to move income.
Once someone is on payroll, the usual payroll rules apply:
- Source deductions. Income tax comes off each pay. CPP contributions apply to employees aged 18 to 70.
- Employment Insurance. Work for a related employer may not be insurable. The CRA decides case by case, looking at whether the pay, hours and duties are what an unrelated worker would get. If EI is not deducted, the family member also can't count on EI benefits from that job.
- Remittances and slips. The deductions go to the CRA on the corporation's remittance schedule (for most small employers, by the 15th of the following month), and the family member gets a T4 by the end of February.
Our payroll service page explains how we run this each month.
Can I pay my teenager to work in the business?
Yes, if the teenager does real work and the pay fits the work. A 15-year-old who scans receipts, files paperwork or helps in the shop on Saturdays can be paid what you would pay any 15-year-old for that job. Paying the same teenager a manager's wage is where the deduction gets denied.
Keep it ordinary. Write down what they do and when, pay them by bank transfer into an account in their own name, and put them through payroll with a T4 like any other employee. Because most young people earn little else, a modest salary often attracts little or no personal tax. That is a side effect of paying for real work, and the paper trail is what lets you show it.
What about dividends to my spouse or adult children?
Dividends are where the TOSI rules come in. Since 2018, dividends from a private corporation to a family member are generally taxed at the top personal rate unless the person qualifies for an exception. The CRA's guidance on the split income rules sets out the tests. The main ones for family companies are:
- Actively engaged (any age 18+). The family member works in the business an average of at least 20 hours a week during the part of the year it operates, or did so in any five earlier years. Dividends from that business are then excluded.
- Excluded shares (age 25+). The family member owns shares with at least 10% of the votes and 10% of the value of the corporation, the corporation is not a professional corporation, and less than 90% of its business income comes from providing services.
- Reasonable return (age 25+). The amount is reasonable given what the person contributed to the business: work, money put in, risks taken and past payments.
- Owner aged 65 or older. Once the owner reaches 65, amounts paid to the owner's spouse are excluded if they would have been excluded in the owner's own hands.
Children under 18 are treated differently. Dividends from the family corporation to a minor child are almost always taxed at the top rate, so for that age group a salary for real work is usually the only route that makes sense. For ages 18 to 24 the exceptions are narrower still and depend mostly on capital the young person contributed.
Does any of this change for doctors, dentists and other professionals?
Yes, in one important way. The excluded shares exception does not apply to professional corporations, so a spouse who owns non-voting shares in a medical or dental professional corporation can't rely on share ownership alone. Dividends to that spouse usually need the 20-hour test, a reasonable return or the age-65 rule. Our accountant for doctors page covers how this fits with the rest of a physician's planning.
Salary or dividend: which is better for a family member?
There is no single answer. A salary needs real work, creates CPP contributions and RRSP room, and is deductible to the corporation. A dividend needs share ownership and a TOSI exception, creates no RRSP room and is paid from after-tax profit. In many owner-managed companies the answer is a salary for a spouse who works in the business and dividends only once a clear exception applies. Our guide on salary, bonus or dividend before year-end walks through the same choice for the owner.
What records should I keep?
- A short written description of each family member's job and usual hours.
- Timesheets or a simple log of the work done, kept as it happens rather than rebuilt later.
- Pay records showing transfers into the family member's own bank account.
- Payroll remittance confirmations and copies of the T4 slips.
- For dividends, the share register, directors' resolutions declaring each dividend, and notes on which TOSI exception you relied on and why.
If the CRA asks, these records are your answer. Without them, a reasonable salary can still be hard to defend.
Already paying family and not sure it fits?
It can usually be put right going forward. We look at who is being paid, how, and for what, then set up payroll or adjust dividends before the next year-end. You can meet us at our office at 181 Queen St E in Brampton or by video call from anywhere in Ontario. Our tax planning page explains how we review owner and family pay each year.
General education only; not individualized accounting, tax or legal advice.