Farming in Canada has always been a family intensive business, even on larger incorporated farm enterprises.
Spouses in many cases are full partners in the process and chief bookkeepers for the business. Part of normal childhood education on the farm is an ongoing list of farm chores, which can include everything from field preparation, planting, harvesting and livestock care.
The question is whether it is worthwhile to formalize these relationships by paying salaries for time worked.
The first thing to consider is your marginal tax rate. If your income is taxed above the first tax bracket and your spouse’s tax rate is lower, paying your spouse to lower your tax rate is beneficial. Even if it doesn’t lower your tax rate, more family income is taxed at the spouse’s lower rate. Essentially you are splitting income, which is considered an acceptable tax strategy by the Canada Revenue Agency.
Before you place family on the payroll, however, the most important practice to put in place is a detailed record-keeping process that tracks the work-for-pay transactions. You must be able to demonstrate that the work contributes to the value of the business and the payment amount is similar to what you would pay someone who is not a member of your family. Alternatively, do an internet search of what the same function is being paid at an hourly rate in your area.
You can pay by cheque, cash or in-kind but the cancelled cheque is considered the most effective paper record available to you. Paying by cash with a signed receipt can work as well, but paying in-kind is more complicated. The first two methods of payment are more easily considered an expense that will reduce your business income. All payment methods must be reflected in a year-end T4 slip.
You will also have to open a payroll account with CRA and calculate how much income tax, Canada Pension Plan (CPP) and in some family instances Employment Insurance (EI) premiums you must withhold from your family members’ paycheques. These deductions, as well as the portion you must pay for CPP and EI, are more easily tracked and defensible to CRA if you pay family and other employees by cheque. Paying in cash or in-kind makes the withholding and remitting of deductions tricky. CRA provides online calculators and programs to help you arrive at the appropriate withholding amounts.
One benefit of providing your children with taxable income at an early age is they can begin to accumulate contribution room in their Registered Retirement Savings Plans sooner.
Other helpful record-keeping measures are a signed description of the activities to be performed and time sheets of hours and days worked.
Where such claims run afoul of CRA and the courts include instances in which family members are never actually paid and the cheques are endorsed back to the business.
As well, inflated amounts of pay, well above market norms for the work performed, or cases in which the employed child is actually a resident of another city while attending university are easy markers for CRA to reject salary expense deductions.
Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: firstname.lastname@example.org or 800-265-1002.