Paying Family Members from Your Corporation
Many family-run businesses in Canada pay family members for work performed. This can be a legitimate tax planning strategy, but CRA has strict rules.
- CRA requires "reasonable" compensation for family members
- Unreasonable salaries result in double taxation
- Children's wages must match work performed
- Proper documentation is essential
The Reasonableness Test
CRA will only allow salary deductions for family members if the compensation is reasonable for the work actually performed.
What Happens with Unreasonable Salaries?
If CRA deems a salary unreasonable, the excess portion cannot be deducted by your corporation. This means the corporation pays tax on that amount, plus the family member still pays personal tax on what they received.
The result is essentially double taxation at the corporate level—a costly mistake to avoid.
Rules for Paying Your Children
To deduct salary paid to your children as a business expense:
- The work must be necessary for earning business income
- Pay must be comparable to what you'd pay a third party
- Keep documentation proving payment (cancelled cheques, receipts)
- Issue T4 slips and remit proper payroll deductions
Document the actual work performed by family members, research comparable market rates, keep written job descriptions, and process payroll properly with all required deductions.
Need Help Structuring Family Compensation?
Tax Punjabi understands family business dynamics. We can help you stay compliant while maximizing benefits.