When deciding as to 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. On the other side, there is the benefit of lower tax brackets, RRSP contribution room and unused credits.
When considering if/what to pay there are numerous functions that can be performed by family members away from the business premises which are easily overlooked. These functions can include:
- Computer work,
- Answering the telephone and taking messages,
- Purchasing supplies,
- Delivery and pick-ups, and
- Promotional work
To aid the CRA to accept salaries paid to family members as realistic numerous aspects can be considered:
- Having a written contract of employment between the corporation and a family member,
- Salaries should be commensurate with the duties performed,
- The educational background of family members must be considered,do not make payments at professional rates to someone who has not yet finished school
- Do not be overly aggressive in paying salaries to family members, so do not place every family member on the payroll
- Keep copies of cancelled cheques, and
- If payment is made in cash to family members, have them sign receipts.
- salaries to family members are subject to standard payroll deductions
The family members’ salaries would be reported on T4’s (Relevés 1 for Quebec) as they normally would be reported for un-related employees.