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If you have a child or a spouse who is not an owner of your farm or business and who has low or no income from other sources, you may be able to save significantly on your taxes by paying them a reasonable wage for the work they have performed for the business.  This is an entirely legitimate tax-saving strategy, provided that you meet the conditions and follow the rules with regard to paying the wages, reporting them correctly and remitting the applicable payroll deductions.

You need to be able to meet two conditions for the wages paid to be considered tax deductible for your business:

• The CRA permits paying wages to a related party such as your spouse/dependants IF they are performing legitimate work that you would otherwise pay someone else to do.  That can be a tough one to determine, but essentially if the work they are completing has value and allows you to expand your operation or earn more income than you otherwise would, the wages should be allowable.
• Wages paid must be fair and reasonable in the circumstances and must be based on actual hours worked and tasks performed.  Keep in mind that your child or spouse is available and on-site and likely has better knowledge of your enterprise and your particular working methods and may therefore be worth a higher wage than what their age or experience might suggest.

If your situation fits the above criteria, here are a few things you should know:

• Each taxpayer can earn ~ $14,398 (2022) before they pay any federal income tax.  Therefore, provided your spouse/dependant meets the conditions, your family unit could earn much more without incurring tax.
• If your child is over 17, there will be CPP to deduct and pay.
• T4s will need to be completed and filed for any wages paid.
• A tax return will need to be filed for each person receiving wages, and the wages must be reported as income on their returns.

Because of the significant tax savings this strategy can generate, it has been subject to some serious abuse in the past.  As a result, numerous tax court cases have dealt with the deductibility of these wages, etc.  CRA is entirely OK with wages to dependants and spouses, providing the conditions are met, but you must be careful to abide by the letter and the spirit of the Tax Act.  Following are a few conditions that must be met, providing you have decided to pay wages:

• Wages must be paid before the end of the year, and funds MUST be deposited into a bank account under the child’s or spouse’s control.  This does not mean that you, as the business owner, cannot have access to the account, but it must be in the child’s/spouse’s name.
• Your child or spouse can choose to give the money back to you after the cheque has been deposited in their account.  However, this must be on the basis that a) they are reimbursing you for room, board, clothing, etc., or b) that they are loaning the money back to you and that you will then return the funds to them at a later date.
• If the money will be returned to you under the conditions above, we suggest waiting until January 1 or later so that the money sits in their account over the year-end.  Consider the effect this will have on your cash flow.

Many farmers and small business owners find the thought of payroll, T4s, etc., intimidating and therefore want nothing to do with it.  And we sympathize.  However, the additional paperwork, forms, etc., are conditions that must be tolerated if we want to enjoy the benefits.  We also realize that most of you likely do not have software, forms, etc., to calculate the correct deductions, file the right forms, make the remittances on time, etc.  In that regard, we can help.  If you wish, we can calculate the net cheque to be issued (provided you tell us the amount of wages to be paid to each person), ensure the payroll deductions are remitted on time and appropriately, and prepare the T4(s).  If you would like us to do this for you, please send us the necessary information well before the end of the year.