Deducting Expenses for Family Employees: 3 Questions to Ask
Want to stay on the good side of the CRA? Here’s a quick summary of how expenses for family employees works.
If you are a small business owner with a family, odds are at one point or another you’ve recruited (or perhaps drafted!) those nearest and dearest to you to help out with the day to day operations. If that is the case, no doubt you are keenly interested in knowing when and how you can deduct your family members’ wages as a business expense. What guidelines should you follow to make sure that your deductions are aboveboard and beyond reproach in the eyes of the Canada Revenue Agency? Here are 3 questions to ask yourself:
Is the pay necessary?
According to the Canada Revenue Agency’s website, the wages you pay your family members must be “necessary for earning business or professional income.” In other words, their work has to be relevant to the business at hand. For example, if you own an automotive body shop you cannot pay your 18-year-old son to mow your lawn, and then deduct that as a business expense.
Is the pay reasonable?
Another important factor to consider is how closely the amount of pay matches up to the going market rate for similar employment. Again, the CRA makes it clear that “the salary [must be] reasonable when you consider your child’s age, and the amount you pay is what you would pay someone else.” So if a typical job that corresponds to your family member’s work pays an average of $40 per hour, it would be considered unreasonable to pay your spouse $240 per hour, and then turn around and try to claim the deduction. Your spouse may not complain, but the CRA certainly would.
Is the pay documented?
A third factor to keep in mind is how well documented the wages paid to your family member have been. Keeping accurate records is good practice in all financial aspects of a business, but this is especially useful in proving the legitimacy of your deductions for family employees. Per the CRA, if you pay in cash, make a receipt, and have your family member sign it. If you pay via cheque, keep the cancelled cheque. You would do the same for other employees, so why not those related to you? Also, if you pay them with a product from your business, keep a record of the product’s value. The family member would then include the product’s value as part of his or her income.
Many complicated issues may arise when it comes to deducting business expenses, and especially when the line between family and business becomes blurred. The services of an experienced accountant can prove an invaluable resource for your business in this, and many other situations.
We are able to answer many more tax questions you may have and give you the peace of mind that comes with years of professional expertise. Contact us today for more information.
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