Paying your spouse from the corporation without a TOSI problem

There are two clean ways to move corporate money to a spouse, and they are tested differently. Salary for work actually performed is not split income at all, so the tax on split income never reaches it — the only real test is whether the amount is reasonable for the job. Dividends are split income, and they escape TOSI only if your spouse fits a specific exclusion: roughly 20 hours a week in the business, or shares that clear the excluded-share test. A spouse who fits neither has the dividend taxed at the top marginal rate, however little else they earned that year.

Salary is the simpler door, and reasonableness is the whole test

TOSI reaches dividends from a private corporation, some interest, some capital gains, and amounts flowed through a trust or partnership. Employment income is not on that list. Pay your spouse a salary and you are in the ordinary deduction rules instead, where an expense is deductible only to the extent it is reasonable in the circumstances.

Reasonable means one thing here: what you would have paid a stranger to do the same work, at the same hours, with the same skill. If a stranger would have been paid a third of what you ran through payroll, the excess is generally not deductible to the corporation — and it is still taxable to your spouse. You lose the deduction and keep the tax. Which is why the rate deserves five minutes before the first pay run.

Reasonableness is proved with records, not with reasoning after the fact. Four things carry the weight:

• The role — what your spouse actually does, in the words you would use in a job posting.
• Hours, recorded as you go. A shared calendar is enough; a number reconstructed in April is not.
• Where the rate came from — a posting for the same role, a bookkeeping firm’s quote, or what the last person in the job was paid.
• Proof the money moved. Pay deposited to your spouse’s own account on a schedule, not a journal entry dated December 31.

Salary also brings the payroll machinery, and it is not optional. You need a payroll account. Source deductions — income tax and CPP withheld from the pay — go in on the CRA’s schedule for your remitter type. A T4, the slip reporting employment income, is filed by the last day of February for the previous calendar year. CPP is paid on both halves, withheld from your spouse and matched by the corporation. Whether the employment is insurable for EI turns on the non-arm’s-length rules, and the CRA will rule on it; settle that before you withhold premiums. What salary buys in return is RRSP room in your spouse’s name and a T4 a lender can read, often the actual point when your spouse has little other income. The salary-versus-dividend trade-offs are the same ones that apply to your own pay.

Dividends need an exclusion, not a rationale

The default under TOSI is punishing by design. A dividend from your private corporation to your spouse is split income from a related business, taxed at the top marginal personal rate, with most personal credits unavailable against it. The bracket arbitrage that motivated the plan does not shrink — it inverts. There is no corporate deduction for a dividend either, so the dollar is taxed corporately and then again at the top rate.

Amounts escape only by being an excluded amount, and two exclusions matter for a spouse.

The first is the excluded business. If your spouse was actively engaged in the business on a regular, continuous and substantial basis, the dividend is excluded. The bright-line version: generally, an average of at least 20 hours a week during the part of the year the business operates. It is met if the test is satisfied in the current year, or in any five prior years — and those years generally need not be consecutive. That matters more than it sounds: a spouse who ran the office for six years and then stopped can generally keep receiving dividends afterward. Below 20 hours there is a softer facts-and-circumstances test, and it is as unpredictable as it sounds. The bright line exists because the CRA prefers to be shown hours.

The second is excluded shares, the door for a spouse who does not work in the business. Generally your spouse must be 25 or older and own shares directly carrying at least 10% of the votes and at least 10% of the fair market value of the corporation. Then come the carve-outs, which close this door for most of our clients. Generally the corporation cannot be a professional corporation, and less than 90% of its business income must come from services. A dentist’s or physician’s professional corporation is out on the first test. A consultancy that sells time is usually out on the second. Owners hear “10% of votes and value” and start planning a share reorganization before checking whether the carve-outs already disqualify them.

The trap is a dividend to a spouse who neither works nor qualifies

The old pattern — a spouse holding a separate share class, no role, dividends filed at a low bracket — stopped working when TOSI extended to adults in 2018. What replaced it is a flat rule, not a reasonableness override: no exclusion, top rate.

Two things do not rescue it. A directorship is not engagement; a title without hours is still no hours. And there is a reasonable-return exclusion, measured against a recipient’s labour, capital, risk assumed and past contributions, but for a spouse who has none of those it does not apply — it is a test of contribution, not of proportion.

A worked example: 25 hours a week of real admin

Illustrative, round numbers, December 31 year-end. Your spouse handles scheduling, invoicing, chasing suppliers and the books — 25 hours a week, most weeks of the year. That is 1,250 hours over 50 weeks. Suppose the market rate for that role where you operate is C$32 an hour, a number set by the job market rather than by your tax return. The salary figure follows: C$40,000.

Down the salary door, the corporation deducts the C$40,000, which comes off active business income taxed federally at 9% on the first C$500,000 for an eligible CCPC in 2026, with a provincial rate on top. Your spouse gets a T4 and next year’s RRSP room. CPP is paid on both halves. TOSI never enters the conversation. What has to exist is the hours record and something showing where C$32 came from.

Down the dividend door, 25 hours a week clears the 20-hour average, so the excluded-business exclusion is generally available and dividends can be paid on your spouse’s shares without TOSI — assuming your spouse holds shares at all, which is a corporate-law step, not a payroll one. No payroll account, no remittance calendar, no CPP either half. Also no RRSP room and no T4. And no corporate deduction: the dividend is paid out of income already taxed inside the corporation.

Notice the asymmetry. The salary door is capped at what the work is worth; C$40,000 of work does not support C$120,000 of salary. The dividend door has no ceiling of that kind — once the exclusion applies, the amount is not measured against the hours. Which is precisely why the hours evidence has to be genuine on the dividend route: it carries far more weight there than on payroll.

You can use both doors in the same year; the tests are applied separately, salary on reasonableness and dividends on the exclusion.

What changes when the owner turns 65

There is an easing tied to the owner’s age, not the spouse’s. Generally, once you — the source individual, in the statute’s language — are 65 or older in the year, an amount your spouse receives is excluded if it would have been excluded had you received it yourself. In practice it lines TOSI up with pension splitting: a retiring owner’s spouse can receive dividends without passing the engagement test or holding qualifying shares. It applies to a spouse, not to adult children, and it turns on your age in the year rather than the date of the dividend. If you are approaching 65, the sequencing of a share reorganization and a dividend is worth checking against it.

What Cadence does

We establish which door is open before money moves, not at filing. That means checking the excluded-share carve-outs against what your corporation actually sells, checking the hours against the 20-hour average rather than against a recollection, and putting the payroll registration, the T4 and the directors’ resolutions where they belong. Where salary is the route, we set the rate against something defensible and write down what it was. Where dividends are, we say plainly if the exclusion does not hold. This review sits inside year-round planning rather than in the year-end file, and is included in the year-round packages — the answer changes when the business changes, and again at 65.