Expect the CRA to come knocking if you ‘hire’ your spouse

Article content material

With taxpayers in eight out of 10 provinces going through a 2024 prime marginal private income tax price exceeding 50 per cent, it ought to come as no shock that some {couples} are taking a look at methods to revenue cut up, particularly when one partner or associate is in a a lot greater tax bracket than the opposite. Contemplate, for instance, a British Columbia high-income taxpayer going through a prime marginal price of 53.5 per cent. If their partner or associate earns underneath about $55,000, their marginal price is just 22.7 per cent — a selection of greater than 30 proportion factors.

Article content material

There’s a wide range of methods to legally cut up sure forms of revenue with a partner. For instance, with regards to retirement revenue, pension income splitting or CPP/QPP sharing will be efficient. For buyers, utilizing a prescribed rate spousal loan to have any extra returns above the prescribed rate of interest taxed within the fingers of the lower-income partner was the way in which to go when the prescribed price was just one per cent or two per cent. With that price now at 5 per cent as of July 1, 2024, discovering an funding with a assured return in extra of that price is difficult, which is why we’ve seen only a few new spousal revenue splitting loans arrange prior to now 12 months. 

However one technique of revenue splitting that’s usually tried, however doesn’t all the time go muster with the Canada Revenue Agency, is to “rent” your partner or associate to both work in your corporation or, if you happen to’re an worker, to turn out to be your “assistant.” Whereas this generally is a tax-effective technique when it includes authentic work and applicable pay, the CRA is usually fairly skeptical of spousal employment preparations, as one taxpayer not too long ago discovered in a tax case determined final month. 

Article content material

Article content material

Beneath the Revenue Tax Act, an worker is permitted to deduct any “wage” paid to an assistant offered their employment contract “required” the worker to incur the expense and that is licensed by the employer on CRA Form T2200, “Declaration of Conditions of Employment.” The place an expense is just not explicitly required to be incurred by an worker of their employment contract, it may well nonetheless be deductible if it’s discovered to be an implied requirement. In making this dedication, the courts have reviewed whether or not the failure to satisfy this requirement may consequence within the worker’s termination, a poor efficiency analysis or different disciplinary motion on the a part of the employer. 

The latest tax case coping with spousal employment concerned a commissioned worker who wrote off a wide range of employment bills, together with motorized vehicle bills (which have been allowed) and quantities paid to his partner, which have been disallowed. 

The taxpayer was within the enterprise of promoting air conditioners, furnaces and warmth pumps, and different related home equipment. He had a contractual association with Costco and an unique territory. On the Costco entrance, there was a kiosk with clean pre-printed varieties that potential shoppers may fill out to precise their curiosity in these merchandise. These varieties have been collected, and calls have been made to qualify the possible purchasers. If certified, an appointment was scheduled. The taxpayer would then meet with the possible shopper and put together a proposal. If it was accepted, the client signed a contract, and the taxpayer was entitled to a fee. 

Article content material

In the course of the years underneath overview, 2016 and 2017, the taxpayer reported employment revenue of roughly $80,000 and $90,000 respectively, of which about $33,000 annually was fee revenue. Among the many employment bills the taxpayer claimed have been $20,000 “alleged to have been paid” to his partner for every of the 2016 and 2017 taxation years. 

The taxpayer claimed that it was his spouse who made the calls and scheduled the assorted appointments, and accordingly was paid for her companies as a self-employed contractor. Whereas the taxpayer admitted that she was not paid straight, he said that roughly $35,000 in complete was paid to her in 2016, and $31,000 in 2017. The funds have been “paid” to her as her share of mortgage funds, money withdrawals or different debit transactions from a joint checking account. 

In denying these bills, the CRA maintained that the taxpayer didn’t have a contract along with his partner, and did not submit another particulars or paperwork that demonstrated that he paid commissions (or salaries) to her, or {that a} working relationship existed between them. These may have included proof of funds, duties description, timesheets, worker log ebook, T4 slips, and so on. The taxpayer did produce some documentation, together with a Kind T2200, in addition to joint checking account statements. 

Article content material

Throughout cross-examinations, the taxpayer admitted that he had not stored any information of the funds made to his partner and that, though the quantity claimed on his returns for the 2 years in query was lower than the quantity alleged to have been paid to her, he had no understanding as to the way it had been quantified as he relied solely on his accountant to find out the suitable quantity to be claimed. He additionally admitted that the money withdrawals and debit transactions have been for “extraordinary family bills” and weren’t essentially particular to his partner. No deposits have been made to her private checking account. 

The CRA’s place was that any quantities that have been alleged to have been paid to his spouse have been, the truth is, “joint household bills circuitously associated to her.” As well as, there was no proof of any companies carried out by her, and the taxpayer couldn’t produce a log or observe ebook or checklist of consumers allegedly contacted by her at any time in 2016 or 2017. 

The taxpayer argued that there was no want to provide an precise contract and that his testimony alone must be adequate to determine the standing of his spouse as an unbiased contractor, in addition to the quantities paid to her.  

Article content material

The Tax Court docket decide rejected these arguments, and agreed with the CRA as there have been no books and information and no supporting documentation to again up the taxpayer’s assertion that the quantities claimed on his return have been incurred or really paid to his spouse. On that foundation, the decide dominated that the CRA appropriately denied these employment bills. 

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. Jamie.Golombek@cibc.com.

For those who favored this story, join extra within the FP Investor publication.

Bookmark our web site and help our journalism: Don’t miss the enterprise information that you must know — add financialpost.com to your bookmarks and join our newsletters here.

Article content material