Paying Family Members From Your Corporation
A reasonable salary for work actually done is outside TOSI entirely, which makes it the last straightforward income splitting tool left. Work out the defensible range, the household saving and the payroll cost that eats into it.
net benefit
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Is the Wage Reasonable?
| Item | Basis | Amount |
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The Household Saving
| Item | Basis | Amount |
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Employer Costs That Eat Into It
| Cost | Rate | Amount |
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Documentation You Need
| Item | Why It Matters |
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Points That Decide This
What to Do Next
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Disclaimer: Section 67 of the Income Tax Act limits the deduction of an outlay or expense to a reasonable amount, and the CRA applies this to salaries paid to family members by asking whether an arm’s length employer would have paid the same amount for the same work. Where a wage is found unreasonable the excess is denied as a corporate deduction while remaining taxable in the recipient’s hands, producing double taxation on the excess. A salary is required to be for services actually rendered. The tax on split income rules in section 120.4 apply to dividends and certain other amounts and do not apply to salary or wages, so a reasonable salary for work performed is outside TOSI. Employment income paid to a family member is subject to CPP where the employee is between 18 and 70, at 5.95% on pensionable earnings between the $3,500 basic exemption and the $74,600 YMPE for 2026, to a maximum of $4,230.45 each for employee and employer, plus CPP2 at 4% on earnings between the YMPE and the $85,000 YAMPE to a maximum of $416.00 each. Employment between related persons is generally not insurable for EI purposes under paragraph 5(2)(i) of the Employment Insurance Act unless the Minister is satisfied under paragraph 5(3)(b) that a substantially similar contract would have been entered into at arm’s length, so the EI position should be confirmed rather than assumed and a CPT1 ruling can be requested. The Ontario employer health tax applies at rates up to 1.95% on Ontario remuneration, with an exemption available to eligible private-sector employers whose annual Ontario payroll is below the exemption threshold. WSIB coverage and premium rates depend on the industry classification. Corporate tax is applied at the Ontario combined rate of 12.2% on active business income within the $500,000 small business limit. Personal tax is estimated using indicative Ontario combined marginal rates. This page is general information, not tax advice.
Salary Is Outside TOSI, and That Is the Whole Point
The tax on split income rules gutted dividend splitting with family members. They apply to dividends and certain other amounts. They do not apply to salary and wages.
So a reasonable salary paid for work actually done is the last straightforward income splitting tool available to an owner-managed corporation. It is not a loophole, it is simply how employment income has always worked.
| Method | TOSI Applies? | Requires |
|---|---|---|
| Dividends to a family member | Yes, unless an exclusion applies | An excluded amount test |
| Salary for work performed | No | The work to be real and the wage reasonable |
The trade is that salary has to be earned and dividends do not. Dividends need only share ownership. A salary needs someone to actually do work, at hours you could describe to an auditor, for a wage a stranger would have been paid. That is a real constraint and it is also entirely satisfiable.
The Test Is What a Stranger Would Have Been Paid
Section 67 limits a deduction to a reasonable amount. Applied to family wages, the question is whether an arm’s length employer would have paid the same for the same work.
That breaks into two things and both have to hold. The hours must be real, and the hourly rate must be market. Twelve hours a week of bookkeeping at a market rate is defensible. Twelve hours a week at two hundred dollars an hour is not, and neither is a market rate for hours nobody worked.
| Role | Indicative Market Rate |
|---|---|
| General labour or cleaning | $18 to $24 an hour |
| Bookkeeping and admin | $25 to $38 an hour |
| Skilled trade or technical | $35 to $55 an hour |
| Management or business development | $45 to $85 an hour |
An unreasonable wage is taxed twice. The excess is denied as a corporate deduction and stays taxable in the recipient’s hands. That is the worst outcome available and it is why the number should be defensible from the start rather than argued about later.
The Saving Comes From the Rate Gap
Moving income from a high-rate earner to a family member with little or no other income captures the difference between the two marginal rates, plus the family member’s own personal credits.
A family member with no other income pays nothing on the first slice of a wage because of the basic personal amount. That first tranche is the most valuable and the benefit falls away as their income rises.
- The first slice is sheltered by their basic personal amount
- The next tranche is taxed at the lowest bracket while you are at the top
- Their existing income matters, since a family member already earning well saves little
- RRSP room is created for them, which dividends never do
- CPP contributions begin, building their own entitlement
Payroll Costs Eat Into It, So Run the Net
The gross saving is not the answer. Employer CPP alone is five point nine five percent on pensionable earnings, and there may be EHT and WSIB on top.
On a thirty-five thousand dollar wage, employer CPP is close to nineteen hundred dollars. That is a real cost and it comes straight off the saving, which is why a wage that looks worthwhile on the gross number sometimes is not on the net.
Employer CPP is not purely a cost. It is buying the family member CPP entitlement, and the employee half is creditable against their own tax. Treating it as pure waste overstates the drag, particularly for a spouse with no other pension.
EI Usually Does Not Apply, and Should Be Confirmed
Employment between related persons is generally not insurable, so no EI premiums are payable by either side. That is a saving and it also means no EI entitlement.
The exception is where the Minister is satisfied a substantially similar arrangement would have been made at arm’s length. Because it is a determination rather than a bright line, the position is worth confirming with a CPT1 ruling where the amounts are significant, rather than assuming either way and finding out at a payroll examination.
Paying a Minor Child Is Held to the Same Standard
There is no rule preventing it and the reasonableness test applies exactly as it does to anyone else. A teenager who genuinely does filing, cleaning or deliveries can be paid for it.
What draws attention is a wage that could not plausibly have been earned. Full-time hours during school term, or a salary well beyond what the work is worth, invites a question that is difficult to answer. Keep it modest, keep it real, and keep the timesheet.
Documentation Is the Whole Defence
The tax treatment rests on being able to show the work happened. Without that, the wage is just money moved between family members and it will be treated that way.
- A written job description setting out duties and expected hours
- Timesheets or a log kept during the year rather than reconstructed after
- Payment by regular payroll into their own bank account, not cash and not a transfer at year end
- Source deductions remitted on the normal schedule
- A T4 issued by the last day of February
- Evidence of the market rate, such as a job posting for comparable work
One lump sum paid at year end with no timesheets is the pattern that gets reassessed. A regular payroll through the year costs nothing extra to run and is the difference between a defensible position and an indefensible one.
What This Calculator Does Not Cover
- The EI insurability determination, which may need a CPT1 ruling
- WSIB classification and whether coverage is required
- Their personal credits in detail, beyond the basic personal amount
- Employment standards obligations to a family employee
- Paying a family member through a dividend, where TOSI applies instead
- Provinces other than Ontario
Set the wage before the year starts, not at year end. Our payroll service covers the setup, the remittances, the T4s and the documentation that supports the deduction.
Frequently Asked Questions
Common questions on paying family from a corporation.
Related Calculators and Guides
More tools for owner compensation.
Set the Wage Before the Year Starts
Tell us who does what and for how many hours. We will set a defensible figure, put them on regular payroll, handle the remittances and the T4, and keep the documentation that supports the deduction.