WINNIPEG – Children whose parents own businesses such as farms have a financial advantage over others.
Their parents can pay them a salary to do work. It enables the child to start saving early and allows the farm family to reduce its overall tax bill by splitting income.
In a session offering tax tips to the Manitoba Farm Women’s Conference, accountant Ken Grower said the salary idea works well in another situation.
“If you’ve got $4-$5,000, it’s better to pay the child a salary for farm work than put it into a Registered Education Savings Plan.”
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Grower’s argument is that there is no tax benefit or deduction to the parent by putting the money into a RESP. But by reducing parental income by sharing it with children who do work, the parent pays less tax.
One farm woman shared her idea with the group. She puts the child tax benefit, formerly known as the baby bonus, into the child’s account. Then she cashes it and pays it out to the child as wages. As a parent she pays tax on receipt of the child benefit, but she reduces her overall tax bill by using it to split her income.
Grower cautioned farm parents to sign a promissory note if they borrow from their children’s accounts and to always pay by cheque to prove to Revenue Canada that the child received pay for the work he or she did. He said six is probably the youngest age that could claim to do farm work. In an example, he said a job sweeping out a grain bin that would take an adult an afternoon and be worth $100, might take a child three days to do. But the child should only be paid the $100 the job was worth.
Tips for the farm taxpayer
- Net Income Stabilization Accounts are the best savings deal for farmers. This account should receive the maximum dollars the farmer can put in first. Then look at RRSPs.
- In farm companies, Mom and the kids should be shareholders as well as Dad, to spread income around and reduce the tax bill. More shareholders in a farm corporation also allow a larger NISA deposit as each individual can claim part of the eligible net sales and matching amounts from the government.
- In the next 15 years, 70 percent of all North American farms will be transferring the land to the next generation. Fairness to all the children should be the guiding factor, not saving taxes. Parents should protect their retirement by taking a first mortgage or having some hold on the land in case the child defaults on payments, divorces or dies. The child who gets the farm may get more financially than the others, but the non-farming kids should receive assets such as a house in town, or NISA, RRSP or other savings.
