Deciding whether a salary should be paid to a family member

Salaries paid to a family member.

When deciding as to whether a salary should be paid to a family member, or more specifically to ones 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. 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:

-Banking,

-Answering the telephone and taking messages,

– Delivery and pick-ups, and

– Promotional work.

– Salaries commensurate with duties performed,

– The educational background of 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.