Taxes and Employing your Family
Many small business owners employ their family members. This allows them to find employees without conducting a series of interviews, work with people they know and trust, and it also makes it possible to keep the business “in the family.”
However, the Canada Revenue Agency (CRA) may see this situation as one designed to lower taxes. For example, someone who owns a business and earns $75,000 a year could say that they employ their spouse and two children and that these family members are each paid $15,000. This means that the business owner would only claim $30,000 in income. Since a person earning a lower salary would also pay a lower percentage in tax, this strategy saves the family money.
That said, many businesses hire family members legitimately. If you are doing this, you will want to make sure that you follow several guidelines:
- That the person hired actually does the work that they are hired to do
- That the job is required and that someone else would have been hired if the family member was not available
- That the family member is not paid more than another employee would be paid to do the same job
- That the family member is paid regularly for their work, rather than receiving a lump sum once a year, for example
Keeping detailed records is important. A business owner who employs family members may be more likely to be audited by the CRA. Therefore, you will need to show that the family members who are employed by your business are legitimate.
Whenever possible, keep records regarding the hours that the family member worked, the work that was completed, etc. This will help prove to the CRA that your family member does legitimate work.
Upcoming to Changes to Pay Attention To
It’s important to note the recent announcements made by Finance Minister Bill Moreau regarding what he called “income sprinkling.” This is a situation, similar to the one described above, where a business owner lowers his or her own tax obligation by employing family members.
Recently, Morneau stated that “there is evidence that some may be using corporate structures to avoid paying their fair share” of taxes and that the government will be cracking down on these situations. Morneau stated that the government is creating new rules “to determine whether compensation is reasonable, based on the family member’s contribution of value and financial resources to the private corporation.”
While it is still not 100% certain how the government will act to reduce income sprinkling, it appears as though the CRA will be stricter in the future when looking at corporations where family members are employed. This makes it even more important to keep accurate records. It also becomes significantly more important that you have a tax expert on your side if you have a dispute with the CRA. Contact us to discuss your situation today.