Tax Traps to avoid while paying salary to your family members
My name is Aman, and I am a chartered professional accountant. In this article, I will explain the tax tips related to remuneration to employ your s and family members to work in your business with the help of Mark’s story.
Mark is a small business owner, and many of his family members work in his family business.
Mark had difficulty finding how much salary he should safely declare to the family members to minimize his tax burden.
Mark had read in the newspaper that in 2018, the Canadian government had introduced several restrictive rules on the declaration of salaries to family members under the tax on split income regime.
Mark felt angry and disappointed that the rules were complex and hard to understand.
He thought that just a simple act of compensating his hard-working family members should not be so difficult.
Mark went to his Chartered Professional Accountant to solve this problem.
His accountant was a tax professional with a Chartered Professional Accountant designation. He had many years of experience in tax planning to save tax for business owners like Mark.
The accountant told Mark that his family members could earn as much as $13,808 in 2021, which is the basic personal amount for those in the lowest tax bracket before paying any federal tax. On adding other tax credits into the picture, such as tuition tax credits, Marks’s children could earn up to about $20,000 in 2021 before paying any taxes.
The accountant advised Mark that in addition to getting a tax deduction for salaries or wages paid, his spouse or kids who receive the compensation will have earned income, which provides RRSP contribution room, thereby saving them more tax when they contribute to an RRSP and helping them save for the future.
The accountant told Mark that to avoid any issue with the Canada Revenue Agency; he should pay only reasonable salaries to the family members in accordance with their qualifications and skills sets. He also guided Mark to maintain detailed records such as job descriptions, timesheets, matching pay stubs and evidence of payments to family members to prove the deductibility of salaries for tax purposes.
Mark wondered whether he needed to make Employment Insurance contributions to family members’ payroll contributions.
The accountant told Mark that when he pays family members to work in his business, the work may be excluded from employment, which means his family members may not collect employment insurance later if they tried. As a result, he and his family members may not need to pay EI premiums.
Mark had now gained clarity on how the family members’ compensation strategy should be structured to save the tax dollars.
Mark was transformed from a concerned and worried business owner to a confident and tax-savvy entrepreneur with a solid compensation strategy.