Employ your spouse to reduce taxes

You need to hire an assistant. And after interviewing several candidates, you realize your spouse is best suited for the role. As long as he actually works for you and is paid a reasonable salary, you can deduct the wages you pay him from your business income.

In fact, hiring a spouse, partner or child (i.e., someone who is “non-arm’s length”) to work for you can be a great way to income split. But if you do, be sure you follow the rules. Otherwise, you may find your spouse’s salary expense denied as a valid tax deduction.

Read: Tax problems with employing a spouse

Take the recent case (Burlando v. The Queen, 2014 TCC 92) of a British Columbian automobile dealership sales manager. In 2008 and 2009, he reported gross commissions of more than $135,000 and $115,000, respectively, and deducted employment expenses of $39,000 and $40,000, respectively. Nearly half of the employment expenses were for wages paid to his spouse.

Both the manager and his wife testified at trial. He stated his wife worked from home and put in between 4 and 4.5 hours daily, five days per week, at an hourly wage of $18. She was “paid by cash or set off.”

He explained to the judge that since he and his wife had only one bank account, and it was a joint account, there was no “sense of paying her by cheque, which she would deposit in their joint account. Instead, any amounts [that she] withdrew from the bank account or purchased with the debit card or…credit card were set off against the wages she earned.”

His wife testified it was her job to call people who had recently immigrated to Canada to see if they were looking for a vehicle. She also checked Craigslist and would refer potential purchasers to the dealership where her husband worked. She estimated that some days she made four to six calls, while other days she made no calls. She also sent birthday cards to her husband’s customers.

Read: When spouse = business partner

Not believable

The judge found the testimony “self-serving and unbelievable,” especially since it contradicted earlier evidence about what her duties were. Further, the judge found the lack of any documentary evidence to support actual payments from the sales manager to his wife problematic, stating, “he randomly chose amounts from his bank statements and stated these amounts were [his wife’s] wages.”

One discrepancy cited by the judge was that, in some months, the manager included his daughter’s gym membership as part of his wife’s wages, while in other months, the gym membership cost was excluded.

The judge denied the deductions, finding the evidence of a true employment relationship “implausible.” And the judge warned others who may try a similar scheme: “Where there is an alleged working relationship between non-arm’s length parties, there should have been some documentation or independent evidence to support that working relationship. In this case, neither was given.”

So, if you’re an advisor who tries to income split with your spouse or child, you should ensure the amount paid is reasonable. You’ll also want to keep good records, such as copies of cancelled cheques or electronic fund transfers, to prove to CRA a working relationship truly exists.

Before bringing on Family

Some advisors include family in succession plans, while others rely on relatives for administrative help when work piles up.

But mixing blood with money can be disastrous if not managed properly.

While hiring family usually means having staff committed to seeing you succeed, you can’t always be objective about their performance.

To see if adding another dimension to your relationship will work, implement a firm trial period. You’ll want to draw up a written contract specifying roles, responsibilities and pay.

And make sure to ask: How will we objectively measure your performance after you’ve completed your trial period? Why are you fully qualified for the position? Will you book meeting time with me when you need to go over something?

Jamie Golombek , CA, CPA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning and Advice in Toronto.

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.