Last updated: Feb. 7, 2025 

What Happens If I Pay My Relative an “Unreasonable” Salary from My Corporation? 

Many Canadian-Controlled Private Corporations (CCPCs) involve family members in their business and pay them a wage for completing specific job duties. It is also common for CCPCs to have spouses and children as shareholders of the corporation. 

However, the Canada Revenue Agency (CRA) has strict compensation rules for individuals considered non-arm’s length (relatives, like your spouse or children), which can raise potential issues regarding taxation. 

In these cases, the CRA will only deem the salary reasonable if you meet specific criteria. 

What Happens if the CRA Deems the Salary Unreasonable? 

The shareholder benefit rules apply to any individual who does not deal at arm’s length with or is affiliated with a corporation shareholder, even if they do not own shares. As such, this income could be viewed as a shareholder benefit or loan, regardless of the individual’s status as a shareholder. 

In such a case, would this high payment to a related person be taxed as a shareholder benefit and income? Would the related individual face double taxation? 

No Double Taxation for Individuals, but Two Levels of Tax for the Corporation 

The good news is that the amount paid to a non-arm’s length person would not be considered a shareholder benefit (under Subsection 15(1)):  

• The unreasonable salary would be considered employment income to the recipient but not also a shareholder benefit to the shareholder. 
• However, the corporation could not make a deduction for this payment, so it would pay corporate tax and personal tax.  
• While no double taxation would exist at the personal level, the corporation would pay two levels of tax. Unreasonable Expenses Are Still Not Deductible 

While you may not face double taxation in a scenario like this, expenses, such as salaries, must still be reasonable to be deductible from income.  

If expenses are considered unreasonable, they are not deductible from that income, and the amount of the expense considerable would be the only portion deducted (i.e., a salary of $5,000 vs. $500,000 could be deducted).  

Essential Deduction Requirements for Paying Children 

There are some special considerations for paying children, especially if they still live with you. To be able to deduct your child’s salary as a business expense, you must meet the following CRA conditions: 

• You pay the salary. 
• The work must be necessary for earning business, professional, or fishing income. 
• The salary should be comparable to what you’d pay a third party for the same work, especially considering your child’s age and experience. 
• Keep documentation that proves you are paying the salary, such as a cancelled cheque, a receipt for cash paid to your child, or a copy of an electrical funds transfer. 
• If you pay your child with products from your business, treat it as a sale and report the product’s value as an expense and income. Make sure your child also includes the same value in their income. 
• You cannot claim the value of board and lodging you provide to your dependent children (or your spouse / common-law partner) as an expense. 

As with all employees, you must pay, deduct and remit the correct taxes from your payroll for any family members you employ. And don’t forget to issue them a T4 at the end of each tax year.  

The Perks of Being Reasonable When It Comes to Paying Family 

While paying an unreasonable salary to a family member does not trigger double taxation to the family, it will disallow the excess salary portion as a deductible for your CCPC, leading to a higher tax burden for your company. 

You must adhere to the CRA’s rules regarding reasonable compensation, documentation, reporting, and remitting all necessary deductions to prevent this. If you could never justify hiring someone outside the family at the salary you pay your spouse or child, it’s a good bet the compensation is too high.  

By doing so, you can fairly compensate family members while minimizing potential tax implications for your business.

Free Download: The Ultimate Guide to Incorporated Small Business in Canada 

Many incorporated business owners feel intimidated by the demands of tax season and the Canada Revenue Agency (CRA) corporate filing requirements. This is completely natural. 

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That’s why we’ve created “The Ultimate Guide to Incorporated Small Business in Canada.”  Not only will it help you get organized for tax season, but it will also help you make sense of your obligations under a corporate structure and take advantage of the benefits! 

About FBC 

For over 70 years, we have helped hard-working Canadian small business owners, farmers, and agricultural producers save time and money by connecting them to a people-powered network of tax, bookkeeping, payroll and financial planning experts. 

We deliver industry-specific support for your business that helps maximize your tax savings, simplify your books and manage your payroll. Our paralegal team can incorporate your business and file your minute books and annual returns. Our financial and estate planning team can help you manage your wealth and plan your transition to retirement. 

Please take 15 minutes to connect with us. Let’s see if we’re a good fit for you and your business. Book online or call us at 1-800-265-1002. 

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Disclaimer: The material above is intended for educational and informational purposes only. Always consult a qualified tax advisor like FBC regarding your specific tax situation.