- If a payment to a family member doesn't fall under a cleaner exclusion, it can still escape TOSI to the extent it represents a reasonable return, measured against what an arm's-length…
- Labour Contributed Work actually performed for the business — hours, responsibilities, and the value that labour would command from an unrelated party doing the same work.
- CRA generally weighs these factors together rather than requiring every single one to point the same direction — but a payment with weak support across most or all of them is much harder…
Not every family member who receives income from a family business fits neatly into the "excluded shares" or "excluded business" categories under the tax on split income (TOSI) rules. For everyone else, there's a broader, more flexible — and more subjective — fallback: the reasonable return test. It asks a straightforward question with a complicated answer: given everything this family member actually put into the business, is what they received a fair reflection of that contribution?
This guide breaks down the factors CRA weighs when assessing reasonableness, and why documentation matters so much in this particular corner of the TOSI rules.
The Basic Idea
If a payment to a family member doesn't fall under a cleaner exclusion, it can still escape TOSI to the extent it represents a reasonable return, measured against what an arm's-length person would have received for making the same contribution to the business. Anything paid above that reasonable amount remains exposed to TOSI even if part of the payment is defensible.
This makes reasonable return a partial exclusion in a way the others aren't — a payment can be split into a reasonable portion (excluded) and an excessive portion (still taxed under TOSI).
The Factors CRA Weighs
Labour Contributed
Work actually performed for the business — hours, responsibilities, and the value that labour would command from an unrelated party doing the same work. Nominal involvement carries little weight here.
Capital or Property Contributed
Money, assets, or property the family member put into the business, and the return an arm's-length investor would expect for providing that same capital.
Risks Assumed
Whether the family member personally guaranteed debt, put personal assets on the line, or otherwise bore real financial risk connected to the business — as opposed to receiving income with no corresponding exposure to loss.
Amounts Previously Paid or Payable
The history of payments already made to (or owed to) the family member for their contributions, which provides context for whether a new payment fits a consistent, defensible pattern rather than appearing out of nowhere.
How These Factors Interact
| Factor | What strengthens it | What weakens it |
|---|---|---|
| Labour | Regular, documented, substantial work | Sporadic, undocumented, or token involvement |
| Capital | Real funds or assets contributed, at risk | No actual capital contributed |
| Risk | Personal guarantees, exposure to loss | No financial exposure at all |
| Payment history | Amounts consistent with a documented pattern | A sudden, unexplained lump sum |
CRA generally weighs these factors together rather than requiring every single one to point the same direction — but a payment with weak support across most or all of them is much harder to defend as reasonable.
Why Documentation Is the Real Battleground
Reasonable return disputes tend to come down to evidence, not legal theory. A family member who genuinely contributed labour or capital but never documented it in real time — timesheets, loan agreements, minutes recording a capital contribution — often struggles to reconstruct that record years later during a CRA review. The legal test may be reasonably well understood; proving the facts that satisfy it is usually the harder part.
Frequently asked questions
Is there a bright-line percentage or dollar figure that counts as "reasonable"?
No — reasonableness is assessed on the specific facts of each contribution rather than against a fixed formula or percentage. This is one of the more subjective corners of the TOSI rules, and it is exactly why documentation and professional advice matter more here than in the more mechanical exclusions.
If a family member's contribution changes each year, does the reasonable amount change too?
Generally yes — the analysis is meant to reflect what was actually contributed in the relevant period, so a family member who scales back their involvement should expect the reasonable-return analysis (and the amount that can safely be paid) to scale back as well.
Can salary and dividends both be assessed under this test?
The reasonable return exclusion specifically addresses certain types of income, including dividends, that would otherwise be caught by TOSI. Salary paid for genuine work is generally assessed under ordinary reasonableness-of-compensation principles rather than the TOSI reasonable return test specifically, though both concepts ask a similar underlying question.
What happens if only part of a dividend is found to be reasonable?
The portion found reasonable can be excluded from TOSI, while the excess remains subject to TOSI's top-rate treatment. It is not an all-or-nothing outcome.
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