Family Business Success: Smart Income Splitting Through Reasonable Salaries in Canada
- skgfinancial
- Jan 30
- 2 min read
Running a family business in Canada offers unique opportunities for tax-efficient income distribution. One of the most effective strategies is paying reasonable salaries to family members who contribute to your business. Let's explore how this approach can benefit both your business and your family while staying compliant with CRA regulations.
Understanding Family Salary Benefits
The Power of Income Splitting When structured correctly, paying salaries to family members can:
Reduce your overall family tax burden
Build retirement savings opportunities
Create income for family members in lower tax brackets
Support the next generation's financial independence
What Makes a Salary "Reasonable"?
The CRA closely scrutinizes family salaries. Here's what they consider reasonable:
Hours worked and frequency of work
Skills and training required for the role
Comparable market wages for similar positions
The actual value of services provided to the business
Real-World Example: Consider the Thompson family business. Sarah Thompson runs a successful retail store and employs her university-student daughter, Emma, to manage their social media and e-commerce platform for 15 hours per week. Emma's $18,000 annual salary reflects market rates for similar part-time social media roles, making it a reasonable expense while providing Emma with income that's taxed at a lower rate.
Building Retirement Benefits
One often-overlooked advantage is the RRSP opportunity:
Earned income creates RRSP contribution room
Family members can start building retirement savings early
Tax-deferred growth benefits long-term wealth accumulation
Potential for future pension income splitting
Documentation is Key
To support salary reasonableness, maintain:
Detailed timesheets
Job descriptions and responsibilities
Payment records and T4 slips
Performance reviews and work outputs
Contracts or employment agreements
Common Pitfalls to Avoid
Be careful to avoid these red flags:
Paying salaries without actual work being performed
Overcompensating for basic tasks
Inconsistent payment patterns
Lack of proper documentation
Paying young children for complex work
Strategic Implementation Tips
When implementing a family salary strategy:
Create clear job descriptions
Document hours and responsibilities
Pay market-competitive rates
Maintain professional work standards
Keep detailed records of all work performed
Tax Planning Opportunities
Consider these additional benefits:
Employment Insurance (EI) eligibility
Canada Pension Plan (CPP) contributions
Child care expense deductions for working parents
Tuition tax credits for students
Looking to the Future
A well-structured family salary strategy can:
Prepare the next generation for business leadership
Build valuable work experience for family members
Create legitimate income-splitting opportunities
Support long-term family wealth building
Need guidance on implementing a family salary strategy that meets CRA requirements while maximizing benefits for your business? Our team at SKG Financial specializes in family business tax planning and compliance.
Connect with Us!
If you’re interested in learning more, don’t hesitate to reach out!
📧 Email: info@skgfinancial.com
📞 Phone: 416-984-4007
Remember: Tax laws can change, and individual situations vary. This article is for informational purposes only and should not be considered professional tax advice.
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