Paying Family Members at Year-End: Salaries and TOSI (2026)

Reviewed by Bader A. Chowdry, CPA, CA, LPA on November 2, 2026

Yes, you can pay your spouse or children from your corporation before December 31, 2026, but the method matters. A salary is deductible to the corporation only if it is reasonable for real work, and it is never caught by the tax on split income (TOSI). A dividend needs no work at all, but for most adult family members it is taxed at the top marginal rate under TOSI unless a specific exclusion applies. This guide walks through the reasonableness test, payroll obligations for family employees, the TOSI exclusions that matter for Ontario owner-managers, and a worked comparison for an adult child under and over 25.

Can your corporation deduct a salary paid to your spouse or child?

It can, provided the amount is reasonable. Section 67 of the Income Tax Act says no deduction is allowed for an outlay or expense “except to the extent that the outlay or expense was reasonable in the circumstances.” The CRA applies this to family wages in plain terms. In its guidance on salaries paid to a child (the same rules apply to a spouse or common-law partner), the CRA lists three conditions:

• you actually pay the salary;
• the work is necessary for earning business income; and
• the salary is reasonable given the person’s age, and it is what you would pay someone else for the same work.

In practice, “reasonable” means a market rate for real duties. A 16-year-old filing invoices two evenings a week supports a part-time wage at the going rate, not $60,000. A spouse who runs payroll, collections and HST filings can support a salary in line with what you would pay an outside bookkeeper. If the CRA finds part of a salary unreasonable, that excess is not deductible, yet the family member still reports the full amount.

Keep a short job description, timesheets and proof of payment (cancelled cheques, bank transfers, or a signed receipt for cash, as the CRA suggests). If you plan to accrue a year-end bonus instead of paying it in December, the bonus has to be paid within the 179-day window to be deductible in 2026; see our guide to the bonus accrual 179-day rule.

Do you need to run payroll, CPP and EI for a family employee?

Yes for income tax and CPP; maybe not for EI. The CRA’s page on employees who are family members sets out the rules:

• Income tax: you must withhold income tax for a related employee exactly as for anyone else.
• CPP: you must deduct CPP contributions for a related employee, with one exception: a spouse or common-law partner whose pay you cannot deduct as an expense. For 2026 the rate is 5.95% each for employee and employer on earnings between the $3,500 basic exemption and the $74,600 YMPE, to a maximum of $4,230.45 each, plus CPP2 of 4% on earnings between $74,600 and $85,000 (maximum $416). CPP starts with the first pay dated in the month after the employee turns 18.
• EI: employment between related persons is non-arm’s length, so it may not be insurable. It becomes insurable if, looking at pay, hours, duration and the nature and importance of the work, it is reasonable to conclude you would have hired an unrelated person on substantially similar terms. If insurable, the 2026 employee rate is 1.63% on insurable earnings up to $68,900.

On the T4, a non-insurable family employee is reported with box 28 (EI exempt) checked; either party can request a CPP/EI ruling if unsure. Slips for 2026 are due by the last day of February 2027; because February 28, 2027 is a Sunday, the CRA’s next-business-day rule moves that to March 1, 2027. Remittance timing for the December payroll is covered in our payroll remittance due dates guide, and you can test the deductions with our payroll calculator.

When do dividends to family members get hit by TOSI?

TOSI (section 120.4 of the Income Tax Act) taxes “split income” at the highest marginal rate, which the CRA states as 33% federally. Ontario adds its own tax on split income on line 61510 of Form ON428. Only the dividend tax credit, the disability tax credit and the foreign tax credit can reduce TOSI, so the basic personal amount does not help.

Who is caught? A “specified individual” is any Canadian resident 18 or older at year-end, and anyone 17 or under with a Canadian-resident parent. Split income includes dividends and shareholder benefits on private-company shares, plus certain interest, partnership and trust income. For adults, it is caught only when it comes from a related business: one in which a related Canadian-resident “source individual” (usually you, the owner) is actively engaged, or a corporation in which that person owns at least 10% of the share value. So a dividend to your spouse, adult child or parent is presumed caught unless an exclusion applies.

Which TOSI exclusions actually apply to family members?

The CRA’s line 40424 page lists the exclusions. The ones Ontario owner-managers use most:

• Excluded business (age 18+). If the family member is actively engaged in the business on a regular, continuous and substantial basis, either in the current year or in any five prior years, dividends from that business are excluded. Working an average of 20 hours or more per week during the part of the year the business operates is deemed to meet the test. Below 20 hours it becomes a question of fact. Keep timesheets or payroll records; the CRA says these will establish the hours.
• Excluded shares (age 25+). Income from shares the person owns directly is excluded if all of these are true: the corporation earned less than 90% of its business income from services in its last tax year; it is not a professional corporation of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor; the person owns shares with at least 10% of the votes and 10% of the value of the corporation; and the corporation’s income is not derived from another related business.
• Reasonable return (age 25+). Amounts that are reasonable having regard to the person’s work, property contributed, risks assumed and amounts already paid to them are excluded. For ages 18 to 24 the reasonable-return exclusion is narrower: it covers only a return on “arm’s length capital” (their own money, not borrowed and not gifted by a relative) or a prescribed-rate safe harbour return.
• Spouse of an owner aged 65+. If your spouse or common-law partner is at least 65 at year-end, an amount you receive is excluded if it would have been an excluded amount for them. In practice, if the 65-plus owner meets the excluded business test, dividends paid to the other spouse are generally outside TOSI.

Two traps: family members under 18 cannot use the excluded business exception, so private-company dividends to minors are almost always TOSI. And a consulting, IT or other service company usually fails the “less than 90% from services” condition, so its 25-year-old shareholders need the excluded business or reasonable return route instead.

Salary or dividend for an adult child: how do the numbers compare?

Assume an Ontario corporation that sells products (so it is not a service or professional corporation) and pays an adult child $30,000 in 2026. The child has no other income. The federal figures below use the 2026 rates verified on canada.ca; a $30,000 non-eligible dividend grosses up by 15% to $34,500 of taxable income.

Scenario	Deductible to corporation?	CPP / EI	TOSI?	Federal tax on the $30,000
A. Salary, child aged 22, 12 hours/week of real bookkeeping work at a market rate	Yes, if reasonable (s.67)	CPP $1,576.75 employee + $1,576.75 employer; EI only if the job is insurable	Never applies to salary	Ordinary graduated rates (14% first bracket) with personal credits
B. Dividend, child aged 22, same 12 hours/week	No	None	Yes: under 20 hours, under 25, no arm’s length capital	About $8,269.62 (33% of $34,500 less the $3,115.38 federal dividend tax credit), plus Ontario TOSI
C. Dividend, child aged 22, works 25 hours/week year-round	No	None	No: excluded business (18+, 20+ hours)	$0 (14% of $34,500 is fully offset by the basic personal amount and dividend tax credit)
D. Dividend, child aged 26, does not work in the business, owns 10%+ of votes and value	No	None	No: excluded shares (25+, non-service corporation)	$0, same calculation as C
E. Dividend, child aged 26, owns non-voting shares only, contributes nothing	No	None	Yes: fails the 10% votes test; reasonable return likely nil	About $8,269.62, as in B

For a family member working under 20 hours a week, a reasonable salary is usually cleaner: deductible, pensionable, and outside TOSI. Dividends work at ordinary rates for those working 20+ hours, or aged 25+ with real voting equity in a non-service corporation. Our salary vs dividend guide for 2026 covers the owner’s own mix.

Ontario tax is not shown because it depends on surtax, health premium and low-income reduction details; scenarios B and E also attract Ontario TOSI.

What should you do before December 31, 2026?

1. Confirm each family member’s age at December 31, 2026: 18 and 25 are the TOSI turning points; 65 matters for the spousal exclusion.
2. Log duties and hours now. Hours recorded during the year beat a reconstruction in April.
3. Run salaries through payroll before year-end, with tax and CPP withheld and remitted; decide on EI or request a ruling.
4. Check the share register: classes, votes, value, and whether income is mostly from services.
5. Document dividends with a directors’ resolution dated in 2026.

Frequently asked questions

Does TOSI apply to salary paid to my spouse or child?

No. The CRA states that the TOSI rules do not apply to salary received by an individual. A salary must still be reasonable under section 67 of the Income Tax Act to be deductible by the corporation.

How many hours does a family member need to work to avoid TOSI on dividends?

A family member aged 18 or older who works in the business an average of 20 hours or more per week during the part of the year the business operates is deemed to meet the excluded business test. Below 20 hours, it is a question of fact whether they were actively engaged on a regular, continuous and substantial basis.

Do I have to deduct EI from my child’s or spouse’s pay?

Not always. Employment between related persons is non-arm’s length and may not be insurable for EI. It is insurable only if it is reasonable to conclude you would have offered a substantially similar contract to an unrelated person. Income tax and CPP must still be deducted, except CPP for a spouse whose pay is not deductible.

Can my 26-year-old child receive dividends without TOSI?

Yes, if the shares are excluded shares: the child owns at least 10% of the votes and value, the corporation earns less than 90% of its business income from services, it is not a professional corporation, and its income is not from another related business. A reasonable-return or excluded-business exclusion may also apply.

What rate does TOSI charge?

TOSI is calculated at the highest marginal tax rate, which the CRA states as 33% federally, plus Ontario tax on split income. Only the dividend tax credit, disability tax credit and foreign tax credit can reduce it.

Official sources

• Income Tax Act, section 67: General limitation re expenses (Justice Laws)
• CRA: Line 40424, Tax on split income (exclusions and definitions)
• CRA: Frequently asked questions, income sprinkling
• CRA: Employee who is a family member or a related person (CPP and EI)
• CRA: Line 9060, salaries paid to your child or spouse
• CRA: CPP contribution rates, maximums and exemptions
• CRA: EI premium rates and maximums
• CRA: RC4120 Employers’ Guide, filing the T4 slip and summary

General information only, not tax or legal advice. Figures are current as of November 2, 2026 and can change; confirm your situation with a qualified advisor before acting. Insight Accounting CPA Professional Corporation, Mississauga, Ontario.