Putting your spouse or teen on your small business’ payroll can be legitimate and useful if you do it by the book. This article explains paying family members’ salary in Canada: What counts as real work, how to set a reasonable wage, and the Canada Revenue Agency (CRA) rules for T4s, Canadian Pension Plan (CPP) Employment Insurance (EI), and record-keeping so your deductions stand up at tax time.
Can you pay family from your business?
Yes, if they work in the business and you pay a reasonable wage for the duties performed. That’s the core CRA standard. Treat the role like any other job: Define tasks, track hours, pay market rates, and run payroll properly. Do that, and salaries to a spouse, adult child, or even a teen employee are deductible to the business and taxable to the recipient.
Why owners do it
For many small businesses, a spouse handles administrative tasks, books, or operations; older teens help with retail, social media, or shop work. Paying them via payroll can be fair compensation, improve household cash flow, and move tasks off the owner’s plate. Just remember: It’s not income splitting for its own sake; it must reflect real work at a reasonable rate.
“Reasonable” pay: What it means in practice
CRA expects you to pay roughly what you would pay a non-family employee for the same work in your region. Here is a quick way to show that:
- Write a short job description;
- Track hours (use timesheets or a simple app); and
- Keep evidence of the going rate (e.g., local job postings, prior invoices).
If your spouse runs the front desk 15 hours a week at $24/hour and you have timesheets plus a task list, you’re on solid ground.
Employee vs. contractor
If your family member works under your direction, on your schedule, using your tools, they’re an employee; pay them via payroll and issue a T4. Calling them a contractor and issuing a T4A while treating them like staff is risky and can lead to assessments for source deductions, penalties, and interest. Use contractor status only if it’s genuinely a separate business with control over how and when the work is done.
Payroll setup: Keep it simple
Open and confirm a payroll account under your business number, add the family member as an employee, and run pay periods as you would for anyone else. Withhold income tax and (where applicable) CPP and EI, then remit by the required deadline (most small remitters pay by the 15th of the following month).
About CPP and EI (family specifics):
- CPP: Employees 18-69 generally contribute on pensionable earnings. Under 18 or over 70 are exceptions.
- EI: If you (alone or together) control greater than 40% of the company’s voting shares, employment may be non-insurable for EI; many owner-family roles are not EI-insurable. Document why, and don’t deduct EI if it’s not insurable.
- Minimum wage and labour rules: Family status doesn’t override employment standards, follow BC minimum wage, vacation pay, and records rules.
Paying a teen employee (14-17)
You can employ your teen if provincial employment standards are met and the work is safe and age-appropriate. Pay at least minimum wage, track hours, and issue a T4 like any other employee. CPP won’t apply before age 18; income tax withholding may still apply depending on earnings and TD1 claims.
Spouse on payroll
This is common and legitimate when your spouse genuinely handles operations, books, scheduling, marketing, or management. Keep documentation sharp in regards to hours, tasks, access to systems, and evidence of ongoing involvement. If your spouse is also a shareholder or director, you can still pay a salary for employment duties; just keep the job duties separate from ownership activities.
How (and when) to issue T4s
At year-end, issue a T4 to each family employee with total employment income and withholdings, and file the T4 Summary by the CRA deadline (end of February). If you paid a bonus, include it in the T4 year to which it applies and make sure the source deductions were remitted on time.
Keep a paper trail that protects you
You don’t need a novel, just tidy, credible records that include:
- Short job description, start date, and hourly rate/salary;
- Timesheets (or calendar logs) and basic supervision notes;
- Copies of TD1/TD1BC forms and signed offer/acknowledgement;
- Payroll reports showing gross pay, withholdings, and net pay; and
- Direct-deposit records to the family member’s account.
If CRA ever asks, you can show real work at a reasonable rate, paid through payroll, with proper remittances.
What not to do
- Don’t pay for non-work or backdate hours.
- Don’t set an inflated wage to “use up brackets.”
- Don’t mix personal and business accounts; always pay from the business.
- Don’t skip source deductions (income tax/CPP where applicable).
- Don’t leave year-end to the last minute and miss T4 deadlines.
Example: A spouse works in a part-time administrative role. Your consulting corporation grows. Your spouse takes on phones, invoicing, and scheduling for 12-15 hours a week. You set a wage of $25 per hour based on local postings, run payroll twice monthly, deduct income tax and CPP (no EI because the corporation is greater than 40% owner-controlled), and keep timesheets. At year-end, you issue a T4. The expense is deductible to the company; your spouse reports the employment income on their T1.
Frequently asked questions
Can I pay my child under 18?
Yes, for real work at market wages, with hours tracked and paid through payroll. CPP won’t apply until 18; income tax withholding depends on earnings and TD1 claims.
Do I have to pay EI to a family member?
Often, not when the employment is non-insurable (e.g., you control greater than 40% of voting shares). Assess insurability; if it’s non-insurable, don’t deduct EI.
Is a salary to my spouse always deductible?
It’s deductible when the work is real and the wage is reasonable for the duties. Keep a paper trail.
What if my spouse or child helps only occasionally?
Pay only for actual hours worked. If it’s sporadic, you can still run it through payroll; just keep accurate timesheets.
Can I just pay a dividend instead?
Dividends are owner distributions, not wages. If a family member is working, salary via payroll is the appropriate route. (If you’re deciding how to pay yourself as an owner, see this post on salary vs. dividends.)
The bottom line
Paying family members is acceptable and common when you treat it like any other employment relationship: Real duties, reasonable pay, proper payroll, and clean records. Do that, and it’s a legitimate expense for the business and straightforward income for your spouse or teen.
Tax rules can be complex. This article is not intended as tax advice, and you should not make tax decisions based solely on the information presented. You should seek the advice of a chartered professional accountant before implementing a tax plan or taking a tax filing position.
Originally published by RHN Chartered Professional Accountants.
