Paying Wages to a Spouse or Dependant

Suppose you have a spouse or child(ren) who actively assists with your business or farm activities, but does not have an ownership interest in the enterprise. In that case, you may be able to take advantage of a significant tax planning opportunity by paying a fair wage for the labour or expertise contributed.  Here are a few points to help you determine whether or not this approach might be an advantage for you:

• You have a spouse or dependant who is actively involved in your farm or business, but who has no ownership stake  (if your farm or business is a partnership, and your spouse is a partner, there is no point in paying wages to your spouse, although paying wages to your dependants is still an option)
• Your spouse or dependant(s) have little earnings from other sources, or they have significantly lower taxable income than you have
• You are not actively paying your spouse or dependant(s) wages (other than perhaps a small allowance)

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

• The CRA permits paying wages to a related party such as your spouse/dependants if they perform legitimate work that you would otherwise pay someone else to perform.  That can be a tough one to determine. Still, 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.
• The wages paid must be fair and 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.
• Each taxpayer can earn ~ $15,705 (2024) before paying any federal income tax.  Therefore, provided your spouse/dependant meets the conditions, your family unit could potentially earn that 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.

Important points to consider:

Because of the significant tax savings this arrangement can generate, it has been subject to some severe abuse in the past.  As a result, there have been numerous tax court cases dealing with the deductibility of these wages.  CRA is entirely OK with wages to dependants and spouses, providing the conditions are met, but we need to 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:

• Payment must be issued before the end of the year, and the recipient must deposit into a bank account under the child’s or spouse’s control.  This does not mean that you as the business owner cannot access 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 should be on the basis that a) they are paying 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 once they reach 18 or whatever other age you deem appropriate.  If your child or spouse is loaning the money back to you, be sure to pay a reasonable amount of interest on the money and draw up a loan agreement specifying rates, terms of repayment, etc.
• If the employee will return the money to you under the conditions above, it would be better to have this transaction occur on January 1 or later so that the money sits in their account over the year-end. However, this may cause cash flow challenges, so you may want to make arrangements for a temporary increase in your credit facility ahead of time.

We can help:

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 you’re going 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 proper 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), prepare the remittance form and instruct you on how/when/where to submit the payroll remittance, and prepare the T4(s).  Contact us if you would like assistance or if you want to discuss how this opportunity might apply to your particular situation.