Hiring Family Members: Tax Benefits and the TOSI Rules – A Complete Guide by a Montreal CPA Firm Near You

Hiring family members in Canada can be an excellent tax strategy when done

correctly—but a costly mistake when done improperly. Many business owners want to

pay their spouse or children to help in the business, hoping to reduce overall household

taxes. When structured properly, hiring family members can allow income splitting,

payroll deductions, RRSP room creation, and legitimate compensation for real work

performed. However, CRA enforces strict rules under the Tax on Split Income (TOSI)

regime, ensuring that unreasonable salaries or dividends to family members are denied

or taxed at the highest marginal rate. Understanding the tax benefits of hiring family

members in Canada—while complying fully with CRA’s TOSI rules and “reasonableness

tests”—is essential for any family-run business. This guide explains what is allowed,

what is not, how CRA analyzes family employment arrangements, and how to stay

compliant.

Legal and Regulatory Framework

Hiring family members is governed by multiple provisions of the Income Tax Act.

• Section 5: salaries must be reported as employment income and are deductible to the

employer if they are reasonable.

• Section 67: expenses, including salaries, must be reasonable in amount.

• Section 18(1)(a): salaries must be incurred to earn income.

• Section 120.4: the TOSI rules apply to certain dividends and income received by

family members unless exemptions apply.

• Payroll requirements: employers must withhold and remit CPP, EI (if applicable), and

income tax, and must issue T4 slips.

CRA allows salaries to spouses and children of any age, provided:

• the work is real,

• the duties are legitimate,

• the wage is reasonable for the work performed.

Dividends may be paid only when the shareholder meets specific “excluded business”

or “excluded shares” conditions under TOSI.

These rules form the legal basis for hiring family members in Canada.

Key Court Decisions

Several important decisions have shaped CRA’s enforcement of family employment and

TOSI rules.

In Krauss v. The Queen, CRA denied salaries paid to family members because duties

were minimal and the wages were excessive. The court upheld the reassessment,

confirming the reasonableness test.

In Neuman v. Canada, the Supreme Court confirmed that dividend income paid to family

members must reflect legal and economic reality, not be used solely for tax reduction.

In Drew v. Canada, CRA reclassified dividends paid to a spouse as salary because the

corporation attempted to avoid payroll deductions.

In Pilon v. Canada, CRA successfully applied TOSI, taxing dividends to family members

at the highest rate because the business activity did not meet “excluded business”

criteria.

These cases show that hiring family members in Canada must be carefully structured to

avoid reassessments.

Why CRA Targets This Issue

CRA aggressively scrutinizes salaries, dividends, and payments made to family

members because this area is frequently abused. CRA reviews:

• salaries that are disproportionately high compared to job duties

• payments to minors who cannot reasonably perform the duties claimed

• dividends paid to spouses with no involvement in the business

• payroll accounts with inconsistencies in hours worked or duties performed

• bookkeeping errors where personal expenses are disguised as salaries

• family-owned corporations attempting to income split without meeting TOSI

exemptions

CRA expects detailed documentation such as job descriptions, timesheets, payroll

records, and proof of work performed.

Because hiring family members can significantly reduce tax when done properly, CRA

heavily enforces compliance in this area.

Mackisen Strategy

At Mackisen CPA Montreal, we help family businesses implement compliant and tax-

efficient strategies when hiring family members. Our approach includes:

• reviewing the business structure to determine whether salaries or dividends are more

beneficial

• preparing formal job descriptions and documenting real duties performed

• determining a reasonable salary by comparing market wages for similar roles

• setting up payroll accounts, remittances, and T4 issuance

• analyzing whether dividends qualify for TOSI exemptions

• designing family shareholder structures that comply with the “excluded shares” and

“excluded business” rules

• documenting involvement of adult children to support dividend eligibility

• creating multi-year income-splitting strategies while avoiding TOSI penalties

Our structured system ensures that taxpayers obtain legitimate tax benefits when hiring

family members in Canada—without triggering CRA reviews.

Real Client Experience

A contractor hired his spouse as an administrative assistant but paid her double the

market rate. CRA reassessed the corporation, denying half the deduction. We

reconstructed her job duties, adjusted payroll, and restored future compliance.

Another client paid dividends to adult children who were shareholders but did not work

in the business. CRA applied TOSI, taxing the dividends at the highest rate. We

restructured the business to allow children to participate legitimately and qualify for

excluded business status.

In a third case, a retail business hired teenage children for evening stocking and

cleaning tasks. CRA questioned the wages, but we provided detailed timesheets and

job duties, and CRA accepted the salaries as reasonable.

These cases show how correct planning prevents reassessments when hiring family

members in Canada.

Common Questions

Business owners often ask whether they can hire their spouse even if the spouse works

part-time. Yes—if the duties are real and wages are reasonable.

Others ask whether children under 18 can be paid. Yes, provided they perform

legitimate work.

Many ask whether dividends or salary is better for family members. Salary creates

RRSP room and CPP credits; dividends may trigger TOSI unless exemptions apply.

Another common question: Can I pay my family members in cash? No—CRA requires

proper payroll, documentation, and T4 reporting.

These questions highlight why understanding hiring family members in Canada is

essential for small business tax planning.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps

Canadian family businesses stay compliant while maximizing legitimate income-splitting

opportunities. Whether you are paying your spouse, children, or extended family, our

expert team ensures precision, transparency, and protection from audit risk.