For a small business, whether operated as a corporation, proprietorship or partnership, it is quite possible that relatives of the owners or partners may be engaged as employees. Due to the closer familial relationship between employer and employee, CRA pays particular attention to ensure that the salary is truly an eligible deduction to the business.
According to CRA, salaries to children and spouses are deductible as long as all of these conditions are met:
- the salary is actually paid;
- the work the family member does is necessary for earning business or professional income; and
- the salary is reasonable when considering the family member’s age and the amount one would pay someone else.
CRA also states that T4s are required for all employees, including family members, and subject to payroll deductions, as appropriate. Payment in the form of room and board is not accepted by CRA.
CRA suggests that the average salary for an arm’s length person providing similar services under similar conditions would provide guidance as to reasonableness.
Action Item: Consider whether family members can perform services for one’s business, and what level of income is reasonable.