Paying Your Spouse and Children, Properly

The tax on split income rules removed the easy version, paying dividends to family members who do nothing. What remains is narrower, legitimate, and defensible if the substance is there.

What Still Works

• Salary for actual work. The test is reasonableness. If your spouse does the bookkeeping, a market rate for bookkeeping is deductible and is not caught by the split-income rules. Pay it through payroll, on schedule.
• The excluded business exception. A family member who is actively engaged on a regular, continuous and substantial basis, generally read as an average of twenty hours a week, in the year or in any five prior years, falls outside the rules.
• Age and ownership exceptions. There are exclusions tied to age and to owning a meaningful stake in a non-service business. They are specific, and they are worth checking against your facts rather than assuming.

What Does Not

Paying a family member a dividend because they are a shareholder, where they neither work in the business nor meet an exception, is exactly what the rules target. The result is tax at the top marginal rate with no credits, which is worse than not splitting at all.

Children

Paying a teenager for real work, social content, warehouse help, data entry, is legitimate and useful: they earn income at a low or nil rate and create RRSP room. The same reasonableness and documentation standards apply, and the work has to actually happen.

What to Do

1. For each family member on the payroll or cap table, write down in one line what they do and why the amount is reasonable.
2. Move any informal cash arrangement onto real payroll.
3. Have the split-income exceptions checked against your actual facts before the next dividend, not after.

General information for Canadian founders, current to 2026. It is not tax advice and does not account for your specific facts. Rates, thresholds and rules change, confirm the current figures before acting.