Income splitting through reasonable family salaries

Paying a family member who works in your business is one of the few income splitting strategies that still functions the way it did a decade ago. Almost everything around it changed in 2018, and a lot of advice written before then is still circulating.

What changed in 2018

The tax on split income, usually shortened to TOSI, was extended to adult family members. Before 2018 it applied mainly to minors. Since then, dividends paid by a private corporation to a spouse, adult child, parent or other related individual can be taxed at the top marginal rate, with almost no personal credits available to reduce it, unless a specific exclusion applies.

The exclusions that matter most in an owner-managed business:

• The excluded business test. The family member is actively engaged in the business on a regular, continuous and substantial basis. An average of 20 hours a week during the year, or during any five earlier years, is deemed to meet it.
• The excluded shares test. From age 25, an individual who owns at least 10% of the votes and 10% of the value of a corporation that is not a professional corporation and does not earn most of its income from services can be outside TOSI on those dividends.
• A reasonable return. From age 25, a return that is reasonable given the work performed, the capital contributed and the risks assumed can be excluded. Between 18 and 24 the test is much tighter and looks mainly at capital actually contributed.
• Age 65 and retirement. Amounts that would have been excluded if received by a spouse aged 65 or over can be excluded in the other spouse's hands.

The practical result is that dividend sprinkling to a spouse who does nothing in the business, which was routine before 2018, generally does not survive TOSI. Salary is a separate matter, and it is governed by a different test.

Why salary still works

TOSI does not apply to employment income. A salary paid to a family member is tested for deductibility under the reasonableness rule instead: the corporation can deduct the expense to the extent the amount is reasonable in the circumstances. If the work was genuinely performed and the pay matches what an unrelated person doing that job would receive, the deduction stands and the income is taxed in the family member's hands at their own rates.

That is the whole strategy. Income lands with someone in a lower bracket, the corporation gets a deduction, and the family's combined tax bill drops.

What CRA treats as reasonable

The factors are the ones you would use to set anyone's pay:

• Hours worked and how regularly
• The skills and training the role requires
• Market wages for comparable positions
• The value the work actually delivers to the business

To illustrate: a retail business employs the owner's university-age daughter to run its social media and online storefront for about 15 hours a week at $18,000 a year. The rate matches what a part-time social media coordinator would earn, the hours are documented, and the work is real. That holds up. The same $18,000 paid to a family member who checks the store's inbox occasionally does not.

The records that support it

Keep the same file you would keep for any employee:

• Timesheets or a log of hours
• A written job description
• Payroll records and T4 slips
• Evidence of the work itself, such as posts, schedules, files or invoices handled

If CRA questions the expense, the question is always evidentiary. A reassessment usually turns on missing records rather than on a genuinely inflated rate.

Two points people get wrong

EI is usually not available. Employment between related persons is generally not insurable, so EI premiums are typically not payable and the family member typically cannot claim EI benefits later. CRA can rule otherwise where the terms of employment are substantially the same as they would be between arm's length parties. Do not build a plan around EI eligibility without a ruling.

CPP still applies. Family employees contribute to CPP the same as anyone else, and the corporation pays the employer's share, so budget for both.

Salary does create RRSP room for the family member, and earned income supports the childcare expense deduction. Both are real benefits of paying wages rather than dividends.

What draws attention

• Pay recorded for work that was never performed
• A rate far above what the task would command on the open market
• Sporadic payments with no consistent pay period
• No documentation of hours or duties
• Young children paid for work they could not plausibly do

Running it properly

Set the job description and rate before the year starts, add the family member to payroll rather than transferring money ad hoc, and keep the records as you go. The mechanics of getting someone onto payroll and remitting correctly are covered in bookkeeping, HST and payroll, and where a family member also holds shares, the salary decision interacts with the dividend question we work through in how to pay yourself: salary or dividends.

Family structures where more than one person draws from the corporation are worth reviewing annually against the TOSI exclusions. Our approach to corporate and personal tax covers that review as part of year-end planning.

All of our corporate and personal tax work

General information only, current at August 2026. Tax rules change and GST/HST status is fact-specific. Confirm your own position before relying on anything here.