When deciding whether a salary should be paid to a family member, or more specifically to one’s spouse, numerous questions arise. On one side, there is the question of the risk involved that the salary may be unreasonable and having the expense being disallowed by the CRA during an audit. On the other side, there is the benefit of lower tax brackets, RRSP contribution room and unused credits. In a situation where the spouse contributes nothing to the business but is paid a salary which, if paid to an unrelated employee, would have been much lower based on the work performed, the risk mentioned above increases.
However, there are numerous functions that can be performed by family members away from the business premises which are easily overlooked. These functions are summarized below:
- Computer work
- Answering the telephone and taking messages
- Purchasing supplies
- Delivery & pickups, and
- Promotional work.
In rendering government decisions to accept salaries paid to family members easier, numerous aspects should be considered such as:
- Having a written contract of employment between the corporation and a family member, just as you would with any employee,
- Salaries commensurate with duties performed,
- The educational background of the family members,
- Not being overly aggressive in paying salaries to family members,
- Keep copies of cancelled cheques, and
- If payment is made in cash to family members, have them sign receipts.
The family members’ salary would be reported on T4’s (Releves 1 for Quebec) as they normally would if paid to an unrelated employee.