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Tax Tips and Pits - The pros and cons of hiring family members
You own a business, whether as a proprietor or president of a small corporation, and you have family you can hire. Should you? This is a loaded question just about every small business owner faces at sometime.
First, from a financial perspective this can work well for either a proprietorship or corporation.
Hiring family keeps the money in the family, so to speak, and of course is a legitimate expense against revenue therefore lowering business tax liability. In addition, there is income splitting when a husband and wife both are working for the business. This may reduce the overall personal tax burden to the family.
Depending on age, the family member may pay into Canada Pension Plan and create Registered Retirement Savings Plan contribution room that will aid in retirement. And if it’s a child of the owner, besides providing income, job training is a benefit.
In addition to the apparent job tasks needed for the business, other tasks that Canada Revenue Agency (CRA) accepts as legitimate tasks include office and company vehicle cleaning, phone answering and clerical duties, computer data entry and internet research, and business errands.
CRA demands that the job performed is one that would have to be performed in the first place, regardless of who is hired, and that the pay must be at fair market value. And the pay rate must be at least the minimum wage – sometimes an embarrassing mistake that CRA catches and will fine accordingly.
As with all things CRA, ensure a clear paper trail. Have a signed offer of employment with job description including remuneration especially if commissions or bonuses are paid, record hours worked, and use business cheques for payment - do not pay cash. Pay on a regular and timely basis - CRA is reluctant to accept an annual pay period.
Since the family member is on the business payroll, source deductions must be withheld and remitted to CRA.
This includes Employment Insurance (EI) premiums, but unfortunately the rules surrounding non-arms length employees and an application for EI are restrictive, to put it mildly. To increase the odds of success, follow the recommendations mentioned.
Now, what about family dynamics?
The decision on rate of pay creates an interesting conundrum and tends to be the one issue that festers and can blow up for the family. Pay too much and you might actually imprison the family member because it will cost them too much to change employers.
And what if one day you decide to cut wages? Or release the family member? What will be the family consequences?
Conversely, if you under pay a family member, what will be consequences if resentment develops?
To state the obvious, regardless of CRA rules, pay a family member a fair market wage rate and, if appropriate, offer personal performance and business profitability incentives. This will provide a level playing field for all employees, family or otherwise, and reward those who deserve it based on effort and outcomes.