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Compensation

Paying your spouse from your corporation: salary, dividends and TOSI

Salary to a spouse sits outside the income-splitting rules, limited only by what the work is worth. A dividend is taxed at the top rate unless it fits an exception.

By Matthew Reeves, FounderAugust 9, 2026 · 8 min read

Summary

Your corporation can pay your spouse as salary or as dividends, and a different rule limits each one.

Salary is the simpler route, because Canada’s income-splitting rules don’t touch wages.1 Those rules, called the tax on split income and usually shortened to TOSI, tax certain payments out of a family business at the highest rate of personal income tax, however little the person receiving them earns. A salary is limited instead by section 67 of the Income Tax Act, which lets your corporation subtract wages from the profit it pays corporate tax on only up to a reasonable amount for the work done. Pay more than that and the extra can’t be subtracted, so the company pays corporate tax on it and your spouse is taxed on it as well. So the real question is whether you’d pay an unrelated person the same money for the same job.

Dividends are the hard part. A dividend is money paid to a shareholder out of profits the company has already paid corporate tax on, and TOSI covers dividends from your own private corporation by default, taxing them at the top personal rate unless your spouse meets one of three exceptions:

  1. Excluded business. Your spouse is genuinely involved in running the business, in the current year or in any five earlier years. An average of 20 hours a week over the months it operates is an automatic pass, and fewer hours can qualify on the facts.
  2. Excluded shares. Your spouse turns 25 or older during the year, personally owns shares carrying at least 10% of the votes and 10% of the company’s value, and meets the corporation’s services and related-business income tests explained below. Professional corporations can’t use this route.
  3. Reasonable return, which is the Act’s phrase for the size of the dividend, not for filing one. It’s weighed against your spouse’s work, money and risk compared with yours, and there’s no number to check yourself against.2

From the year the older spouse turns 65, the younger can also receive dividends that would have escaped TOSI in the older spouse’s hands. We’d usually pay a working spouse a salary, then test any dividend against the exclusions before paying it.

What TOSI costs

“Split income” is the Act’s term for income moved to a family member who’d pay less tax on it. Ordinary dividends on private corporation shares head the list in section 120.4 of the Income Tax Act, and salary isn’t on that list at all.3 Where TOSI applies, subsection 120.4(2) charges the top federal rate, 33% for 2026,4 and most personal credits stop applying, including the basic personal amount that would otherwise shelter up to $16,452 of income in 2026.5 Dividends are also taxed on a “grossed-up” figure rather than on the cash received, so $50,000 of ordinary dividends is taxed as $57,500.

To a spouse with no other income, that $50,000 costs roughly $13,800 in federal tax if TOSI applies, against roughly $550 if it doesn’t.6 Provincial tax sits on top of both figures, and an Ontario resident pays 46.16% in total in 2026, being the federal 33% plus Ontario’s 13.16% with no surtax, because Ontario takes split income out of its surtax calculation.7 The tax is worked out on your spouse’s personal return, on Form T1206, and your corporation reports the dividend on a T5 slip that the CRA (the Canada Revenue Agency, the federal tax authority) matches to that return.8

Excluded business

“Excluded business” is the Act’s label for a business your spouse is involved in enough that dividends from it fall outside TOSI. The test is that they’re actively engaged in it on a regular, continuous and substantial basis, which in practice means real ongoing work rather than a title on paper, and it can be met in the current year or in any five earlier years.9

Subsection 120.4(1.1)(a) supplies the one bright line in that test. A person is treated as actively engaged if they work in the business at least an average of 20 hours a week during the portion of the year the business operates.10 Fewer hours isn’t a failure, but there’s no automatic pass either, so it comes down to what your spouse actually did, and the CRA has accepted evening-and-weekend work in a business that needed no more.11

The five earlier years don’t have to be back-to-back, and once your spouse has five qualifying years behind them they’re permanently outside TOSI on dividends from that business. Those years needn’t be recent, and qualifying years before 2018 count too, so keep evidence of the work your spouse did then.12 Until the fifth qualifying year is behind them, each year is tested on its own, and a year off (e.g. a parental leave) doesn’t reset what’s earned, it just doesn’t count, so the finish line moves back a year.

Excluded shares

Excluded shares can let your spouse receive dividends without having worked in the business or contributed their own money to it. Your spouse must have turned 24 before the year began, so they turn 25 during the year in question or are older, and all three of the following have to hold.13

  • Less than 90% of the corporation’s gross revenue in its last completed tax year came from providing services rather than selling goods. Gross revenue means sales before expenses, while services means work or expertise such as consulting, design, repairs, advice and labour. Selling physical products, licensing software and renting property sit on the other side.14
  • Your spouse personally owns shares carrying 10% or more of the votes castable at an annual meeting, and worth 10% or more of all the issued shares.
  • All or substantially all of the corporation’s income must come from somewhere other than another business related to your spouse, with the corporation’s own business excepted. A company that only holds the shares of a family operating company (a holdco above an opco) usually fails this test.15

The corporation also can’t be a professional corporation, which the Act defines as a closed list of six: accountant, dentist, lawyer, doctor, veterinarian and chiropractor.16

The easing at 65

From the year the older of you turns 65, subsection 120.4(1.1)(c) excludes a dividend paid to the younger spouse, but only where that same dividend would have been excluded had it been paid to the older spouse instead.17 The relief borrows the older spouse’s status rather than creating a new one, so on its own it does nothing.

To provide an example, say you’re 65 and your company makes and sells cabinets, so well under 90% of its revenue is services and your own dividends already escape TOSI as excluded shares. From that year a dividend to your 58-year-old spouse escapes it too, without them owning 10% of anything or working an hour. A consulting company can qualify too if your own dividends escape TOSI through the excluded-business test, because you worked in it enough. The service-business restriction belongs to excluded shares, and doesn’t prevent the age-65 relief from borrowing a different exemption.17

What we’d do

In our view there are two default answers, and which one applies turns on whether your spouse actually works in the business.

If they do, put them on payroll at a documented salary sized to the job, and keep a plain record of the work as you go (e.g. a monthly note of hours against bookkeeping, scheduling and invoicing). Keep it even once their hours run well over 20 a week, because five such years puts your spouse permanently outside TOSI on dividends too. Payroll isn’t free: the company matches your spouse’s Canada Pension Plan contribution, up to $4,646.45 from each side for 2026, and brings a payroll account with the CRA (i.e. an RP account), the remittances that go with it and a T4 slip.18 Family employment can be insurable where substantially similar pay and terms would have been agreed with an unrelated employee, so check before stopping employment insurance premiums. Ask the CRA for a ruling where the family employment’s insurability is uncertain.19

If your spouse doesn’t work in your service business, we’d check their past work and the age-65 relief before paying them dividends. Where neither applies, another exclusion needs a reasoned assessment of their contribution, so we’d hold off until that assessment is documented.

Where all the excluded-shares conditions hold, including the separate related-business income test, that route can work without your spouse contributing labour, and we’d issue your spouse a separate class carrying 10% or more of the votes and the value, bought from the company at full market value with their own money. Their own money matters, because money from you leaves the dividends taxable in your hands under a separate set of rules called attribution, and pricing the shares properly means having them valued.20 The cost is handing a tenth of the company over permanently, so where the easing at 65 is a year or two away and would actually reach you, we’d wait instead.

What would change our answer

Any of these means the plan above should be looked at again.

  • Your spouse’s hours cross an average of 20 a week either way, or the fifth qualifying year completes.
  • Your revenue mix crosses the 90% services line. The test looks at your last completed tax year, so the change lands a year behind: if 2026 revenue drops under 90%, it’s dividends paid in 2027 that benefit.
  • The older of you turns 65, or a spouse dies (the same relief applies, with no age condition), or you begin living separate and apart because the relationship has broken down, at which point you’re treated as unrelated and TOSI stops applying between you.21

Closing thoughts

The tax question here is smaller than the ownership question underneath it. Handing your spouse a tenth of the votes and a tenth of the value of your company is a decision about your marriage and your succession, and we’d want you to decide it on those terms first and check the tax second. The cheapest move here costs nothing: checking whether your spouse already has five qualifying years behind them.

How we handle it

We look at your corporation’s revenue mix, your spouse’s involvement and both of your ages. Then we either set the salary and register the payroll account, or set up the share class, draft the directors’ resolution that declares the dividend and file the T5 slip reporting it. Both personal returns are prepared in the same file as the corporate return, so the split income calculation lines up with the dividends the corporation declared.

Footnotes

  1. Canada Revenue Agency, “Frequently asked questions – Income sprinkling”, question 6, which says the TOSI rules do not apply to salary received by an individual. The same position runs through the CRA’s guidance on the split income rules for adults. Verified 2026-08-09. ↩

  2. Income Tax Act, subsection 120.4(1), definition of “reasonable return”. It names five factors: work performed, property contributed (property includes money), risks assumed, amounts previously paid, and any other relevant factor. The version described here is the one available to an individual who attained age 24 before the year. Paragraph (f)(ii) of “excluded amount” gives 18 to 24 year olds a narrower version, limited to a return on their own arm’s length capital contributions. On the CRA’s approach, see Canada Revenue Agency, “Guidance on the application of the split income rules for adults”. The Agency “does not intend to generally substitute its judgment of what would be considered a reasonable amount unless there has not been a good faith attempt to determine a reasonable amount”. The quoted position is administrative policy the CRA can change rather than law, written against the December 2017 draft proposals and referring throughout to “the Proposals” rather than the enacted section. The CRA also says it will review the amount on the facts where no good-faith attempt was made. Verified 2026-08-09. ↩

  3. Income Tax Act, subsection 120.4(1), definition of “split income”, in the Department of Justice Canada consolidation current to 2026-06-17. The definition also catches shareholder benefits on private company shares, trust and partnership allocations traceable to a related business, interest on debt of a private corporation, and certain capital gains. Verified 2026-08-09. ↩

  4. Income Tax Act, subsections 120.4(2), 248(1) (defining “highest individual percentage”) and 117(2). The 2026 top federal rate of 33% applies to income above $258,482, per Canada Revenue Agency, “Current year tax rates and income brackets (2026)”. Verified 2026-08-09. ↩

  5. Income Tax Act, subsection 120.4(3), and Canada Revenue Agency, “Line 40424 – Federal tax on split income”. Three credits survive. The dividend tax credit offsets the corporate tax already paid on the profits, and is 9/13 of the gross-up on an ordinary dividend under paragraph 121(a). The other two are the foreign tax credit and the disability tax credit. The basic personal amount isn’t among them. It shelters up to $16,452 of income from federal tax in 2026, reduced to $14,829 for individuals in the top tax bracket. Source for both figures: Canada Revenue Agency, “Indexation adjustment for personal income tax and benefit amounts”. Verified 2026-08-09. ↩

  6. Our arithmetic for 2026 on a $50,000 non-eligible dividend, meaning the ordinary kind paid out of profits taxed at the lower small business corporate rate, received by a spouse with no other income. Both figures are federal tax only. The dividend is grossed up by 15% to a taxable amount of $57,500 under paragraph 82(1)(b)(i) of the Income Tax Act. The federal dividend tax credit is 9/13 of that gross-up, or $5,192. With TOSI the federal tax is 33% of $57,500 less $5,192, which is $13,783. Without TOSI it is 14% of $57,500, less a basic personal amount credit of 14% of $16,452, less the same $5,192, which is $554. Bracket figures from Canada Revenue Agency, “Current year tax rates and income brackets (2026)”, where the 2026 first bracket is 14% up to $58,523. Verified 2026-08-09. ↩

  7. Canada Revenue Agency, “Current year tax rates and income brackets (2026)”, for the federal top rate of 33% and Ontario’s top rate of 13.16%. Ontario’s 20% and 36% surtaxes don’t apply to tax on split income. Form 5006-C (ON428), Part C, subtracts Ontario tax on split income from the surtax base at line 64 and adds it back after the surtax at line 69. The 2026 edition of ON428 wasn’t published as at 2026-08-09, so the 2025 form is the current authority. The 46.16% is charged on the grossed-up dividend before the federal and Ontario dividend tax credits come off, so it isn’t the share of the cash your spouse loses. Combined rates for other provinces aren’t stated on this page. Verified 2026-08-09. ↩

  8. Canada Revenue Agency, “Line 40424 – Federal tax on split income”, which sets out Form T1206 and the matching provincial line. The 2026 edition of the form wasn’t published as at 2026-08-09. Verified 2026-08-09. ↩

  9. Income Tax Act, subsection 120.4(1), definitions of “excluded business” and “excluded amount” at paragraph (e). The route is open only to an individual who attained age 17 before the year. The current-year branch of the test isn’t available for capital gains, only the five-prior-years branch. Verified 2026-08-09. ↩

  10. Income Tax Act, subsection 120.4(1.1)(a), deeming a person actively engaged “if the individual works in the business at least an average of 20 hours per week during the portion of the year in which the business operates”. Falling short doesn’t lose the exclusion, because the deeming rule is not the only route and active engagement stays a question of fact. See Canada Revenue Agency, “Frequently asked questions – Income sprinkling”, questions 7 and 8, the latter confirming that the five prior taxation years do not have to be consecutive. The 20-hour rule is the only bright line in the excluded business test. The excluded shares test has its own, being the two 10% thresholds and the 90% services figure. Verified 2026-08-09. ↩

  11. Canada Revenue Agency, “Guidance on the application of the split income rules for adults”, Example 9. Two spouses building a mobile-app business on evenings and weekends both qualify at well under 20 hours a week. The published examples were written in 2018 and 2019 and use those years’ figures, but remain the CRA’s stated administrative position. Verified 2026-08-09. ↩

  12. Income Tax Act, subsection 120.4(1), definition of excluded business, paragraph (b), allows any five prior taxation years without a 2018 starting date. CRA, Guidance on the application of the split income rules for adults, Examples 6 and 7, applies the five-prior-years branch in its guidance for the rules effective in 2018. Verified 2026-09-25 against the Act. Earlier work must still meet the participation test and be supported by evidence. ↩

  13. Income Tax Act, subsection 120.4(1), definitions of “excluded shares” and “excluded amount” at paragraph (g)(i). The share conditions are tested immediately before the dividend, and the shares must be owned directly by the individual. Shares held through a family trust or a holding company therefore can’t qualify. Verified 2026-08-09. ↩

  14. Canada Revenue Agency, “Tax on split income – Excluded shares”. The “Applying the gross business income test” section reads business income as gross business income, being revenue or sales before any expenses. Example 4 confirms that goods consumed in delivering a service stay on the service side even when invoiced separately. Example 3 is a repairs and maintenance business at 95% services in one year and 75% the next. It shows the prior-year timing, so its shares fail for the first year’s dividends and pass for the next year’s. The same page glosses “all or substantially all” as 90% or more. Verified 2026-08-09. ↩

  15. Income Tax Act 120.4(1), definition of excluded shares, paragraph (c), requires all or substantially all income not to be derived directly or indirectly from one or more other related businesses in respect of the recipient. The corporation’s own business is excepted. The related-business test does not allow up to 90% related-business income. CRA adult TOSI guidance, verified 2026-09-25. ↩

  16. Income Tax Act, subsection 248(1), definition of “professional corporation”, being the corporation of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor. Other regulated professions (e.g. engineers, architects, optometrists, pharmacists and psychologists) aren’t on that list. Their corporations usually fail the 90% services test instead. Verified 2026-08-09. ↩

  17. Income Tax Act, subsection 120.4(1.1)(c). The Act tests the older spouse as having attained the age of 64 before the year, so the relief starts in the year that spouse turns 65. Subparagraph (ii) applies the same relief where the spouse has died, tested on their last taxation year and with no age condition attached. Canada Revenue Agency, “Guidance on the application of the split income rules for adults”, Example 12, works through a 60-year-old spouse whose dividend is excluded because the older spouse holds excluded shares. Re-verified 2026-09-25 against ITA 120.4(1.1)(c) and CRA line 40424 guidance: the older spouse’s exemption can arise through excluded business as well as excluded shares. ↩ ↩2

  18. Canada Revenue Agency, “CPP contribution rates, maximums and exemptions” for 2026. Base contributions are 5.95% from the employee and 5.95% from the employer, on earnings between the $3,500 basic exemption and the $74,600 ceiling, to a maximum of $4,230.45 each. A second layer adds 4% from each side on earnings between $74,600 and $85,000, to a maximum of $416 each, per Canada Revenue Agency, “Second additional CPP (CPP2) contribution rates and maximums”. The two together are $4,646.45 from each side, or $9,292.90 counting both. A spouse aged 65 to 69 already receiving a CPP retirement pension can file Form CPT30 to stop contributing. The rest of the payroll machinery, including the remittance schedule and the T4 deadline, works the same for a spouse as for you and is covered in our guide on paying yourself. Verified 2026-08-09. ↩

  19. Employment Insurance Act, paragraphs 5(2)(i) and 5(3)(b), under which employment between people who do not deal with each other at arm’s length is excluded from insurable employment. Paragraph 5(3)(b) lets the Minister of National Revenue restore insurability where a substantially similar contract would have been made between unrelated parties. The outcome isn’t automatic in either direction. CRA, Hiring a family member or a related person, and Employment Insurance Act 5(3)(b), re-verified 2026-09-25. Benefit eligibility has additional conditions beyond whether the employment is insurable. ↩

  20. Income Tax Act, subsections 74.1(1), 74.5(1) and 74.5(13). Subsection 74.1(1) attributes dividends back to you only where you transferred or lent the property. A spouse subscribing for newly issued shares with their own funds therefore sits outside it from the start. Where the shares or the money came from you, subsection 74.5(1) is the way out. It requires fair market value consideration from your spouse, plus an election in your return for the year of transfer opting out of the automatic tax-free transfer between spouses in subsection 73(1). Verified 2026-08-09. ↩

  21. Income Tax Act, subsection 120.4(1.1)(e). Spouses living separate and apart at the end of the year because of a breakdown in their relationship are deemed not to be related for these rules. Verified 2026-08-09. ↩

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