Understanding the nuances of paying your family wages before the end of the year

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An important lesson I learned earlier in life is that having a child made me a parent. Having three children made me a referee. Then my children became teenagers. “Dad, since I have no significant life experience, I decided to take your advice” – never told me any teenager. But I love them all the same. Finally, my kids grew old enough that I could begin to involve them in my tax planning by paying them my business salaries, as well as my wife, Carolyn’s salary. Today I want to talk about the nuances of paying family members’ wages to save tax – because there is more to it than it seems.

Let me start by saying that if you are a business owner, paying a salary or wages to your spouse or children (or any family member, for that matter) before December 31st will provide a deduction. on your business income in 2021, which will save your family tax as long as that person is in a lower tax bracket than yours.

Your family can earn up to $ 13,808 in 2021 (this is the basic personal amount for those in the lower tax bracket) before having to pay tax federal. When you add other tax credits to the table, such as tuition tax credits, many young people could earn up to around $ 20,000 in 2021 before paying taxes. Now here are a few things to keep in mind.

You will create RRSP rights. In addition to benefiting from a tax deduction for wages or salaries paid, your spouse or children who receive the allowance will have earned income, which will allow you to contribute to an RRSP. This will save them more tax when they contribute to an RRSP and help them save for the future.

Make sure they are working. If the Canada Revenue Agency (CRA) comes to the door to ask about the salary or wages paid to your spouse or children, you can be sure that you will be asked to provide a job description, as well as a log of the exact dates and times of the job. was played. So, keep those details. I know of a business owner who was audited and the auditor asked a company employee, “Do you ever see your boss’s wife in the store? The answer was: “Never”. It’s not good. The payroll deduction was denied. I suggest that if you’re going to pay your spouse to work in the company, your employees had better be able to identify your spouse in a list of people (kidding, of course – just make sure your spouse does. something actually works).

Pay only reasonable amounts. Section 67 of our tax law will allow expenses to be deducted only if they are reasonable. What is reasonable in terms of salary or wages? The tax authorities will take into account what you would have paid to an independent third party for the same work. If you pay an unreasonably high salary or wages, the full deduction may be denied. And here’s the crazy thing: Your family member could still end up paying tax on the compensation even if your business isn’t entitled to a deduction. It is a double taxation on the amount. Not good.

Make the payments real. In the case of Muhammedi v. R. (2004 TCC 408), the taxpayer deducted $ 12,500 and $ 3,500 for 1999 and 2000, respectively, as casual labor expenses for work performed by his wife and children. Although checks were issued for child labor, they were deposited into the bank account of the business, owner or spouse. The judge denied the deductions because the funds remained in the control of the parents or the business, rather than the children making the money. In a court decision of June 10, 2021, Prunoiu v. QRA (2021 QCCQ 7555), payroll deductions were refused because there was no evidence that the amounts had actually been paid to family members. So make sure there is proof of payment.

You can pay a salary in kind. Paying wages or salaries by check or wire transfer is the easiest to record and track. But in Aprile v. R (2005 TCC 216), the taxpayer paid the children $ 14,000 to help with the business. He paid them in part by buying them snowmobiles, motorcycles and gasoline for these machines. The judge ruled that this was a legitimate form of compensation. Complicated – but legitimate.

You can avoid EI premiums. When you pay family members to work in your business, the work may be an “excluded job,” which means they might not be able to collect EI benefits later if they do. were trying, and that also means you and your family members may not need to pay EI. bonuses. Speak to an accountant to confirm if the job is an excluded job.

Tim Cestnick, FCPA, FCA, CPA (IL), CFP, TEP, is author, co-founder and CEO of Our Family Office Inc. You can reach him at [email protected].

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