I own a business in Victoria I pay my children a small wage out of the company. Are there any issues with employing family members?
Paying family members a reasonable salary can be used as a tax planning tool to help reduce the overall tax bill of your family. By paying them a reasonable salary the business receives a deduction and the income is taxed in the family members hands and most likely at lower marginal rates. This will also provide the family member with the ability to make CPP and RRSP contributions.
However, if the CRA considers the salary to be unreasonable or not paid, the tax consequences can be significant. If salaries are considered unreasonable by the CRA the deduction for the salary in the business will be denied and the amount will also be considered income for the recipient and taxed their hands. In addition, if the salaries are not actually paid to the recipient then not only will the business loose the deduction, but the amount will taxed in the shareholders hands. Both scenarios defeating the purpose and creating double taxation.
To avoid this problem you will want to ensure that the salaries paid are reasonable, relate to services that were actually performed, they assist the business in earning income and the amounts are deposited into the family member’s bank account. Generally, when determining a reasonable salary you should consider what your business would pay an unrelated party to complete the same services. To ensure that there is support for the services performed and that the amounts were actually paid to the family members you should ensure that there is proof the family member completed the work (ex. time sheets or contracts), that the business issues the family member a T4 and that there is proof that the payments were paid to the family member and deposited into their account.
If you have any additional questions, please contact one of our experienced staff.
Rob Brown, CA