Paying family members from your company: what the CRA looks at

Short answer: salary paid to a family member is deductible only up to a reasonable amount for the work they do, and the tax on split income does not apply to salary. Dividends a family member receives from a related business can be hit by the tax on split income, a federal tax calculated at 33% of the amount, unless an exclusion applies. For a person aged 25 or over, a dividend is excluded to the extent it is a reasonable return based on their work, property, risk and past payments.

Salary to a spouse or adult child

The CRA’s long-standing rule is that a corporation can deduct only a reasonable amount when it pays a salary or management fee to a family member. The tax on split income does not apply to salary. What the CRA looks at is whether the amount fits the job: what the person actually does, how much, and what an outside employee would be paid for it.

Dividends to family members

Since 1 January 2018, the tax on split income can apply to amounts an adult receives from a related business. Split income includes dividends or interest a private corporation pays directly or indirectly to an individual from a related business, and certain capital gains, unless the amount falls within an exclusion.

• An individual aged 25 or over may receive an amount that is a reasonable return from the related business as an excluded amount.
• The CRA’s reasonableness criteria are the person’s labour contribution, the property they contributed, the risk they took, the amounts paid to them before, and other relevant factors.
• The CRA’s guidance says a dividend to a spouse can be an excluded amount as a reasonable return where the spouse works in the business and the amount is comparable to what an arm’s-length person would be paid. Whether that fits is a question of the facts.

These are the exclusions this guide covers. The CRA’s rules have other exclusions that depend on a person’s age, the shares they own and the kind of business, and this guide does not cover them. The CRA’s guidance page sets them out.

What your records need to show

• What each family member does in the business and roughly how many hours, written down at the time.
• Salary paid through payroll, with the source deductions and the T4, the same as for any employee.
• Each dividend backed by a written resolution and a T5, as the salary or dividends guide describes.
• Property or money a family member put into the business, since it is one of the factors the CRA considers.

What this guide does not cover

We do not give advice on how to split pay or dividends among family members. The rules depend on each person’s age, role, contribution and history, and the CRA decides what is reasonable. A tax professional can look at your own facts.

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