Tax problems with employing a spouse

It’s tempting for advisors to hire spouses or partners as assistants. Not only can they help deal with administrative and marketing aspects of the business, but you can also facilitate income splitting by paying him or her a salary.

A recent tax case (Massicolli v The Queen, 2012 TCC 344) demonstrates how difficult it can be for an advisor who’s an employee, not a business owner, to successfully write off the cost of employing a spouse or partner.

Carlo Massicolli paid his wife a salary of about $19,000 in 2002 and $9,500 in 2003, and deducted these amounts from his income as employment expenses.

Under the Income Tax Act, for an employee to deduct expenses it must be demonstrated that the employment contract required him to incur the expense. Furthermore, the employer must certify this on Form T2200.

Massicolli was a broker with National Bank Financial (NBF) from January 1, 2002, to October 1, 2004, before moving to Desjardins Securities. During those two years, he earned 100% of his income through commissions.

He testified that he hired his spouse to help him build his client base from August 2001, to May 2003.

He said her responsibilities included preparing lists of potential clients, mailings, telephone follow-ups, and filing and archiving records he kept on prospects.

While he had access to assistants provided by NBF, Massicolli was permitted to hire an additional assistant at his own expense. He had no written employment contract with NBF, but submitted Form T2200 as evidence to the Court of his ability to hire an assistant.

The form states the decision to hire an assistant “is at the advisor’s discretion.” Massicolli argued the form said NBF cannot actually force brokers to hire an assistant because every broker has a different business model.

This was why a standardized Form T2200 was sent to all brokers, with the description “discretionary” printed next to the requirement to hire an assistant.

In reviewing the evidence on this point, the judge conceded that the requirement under the Tax Act to hire and pay the salary of an assistant doesn’t have to be in an employment contract.

The “essentiality of the expense is sufficient to conclude that there is an implicit requirement to hire and remunerate an assistant,” he explained. But he went on to say “it is not sufficient that the employment contract authorizes the taxpayer to hire an assistant and pay his or her salary. The contract must require it.”

In Massicolli’s case, NBF did not require him to hire and pay an assistant — the firm left it to his discretion.

The judge concluded that the hiring of an assistant “was not essential to the performance of the duties of his employment. The decision to hire (his spouse) as an assistant was more of a choice or preference than a necessity.”

The judge also found the T2200 form to be contradictory: NBF answered the question concerning the requirement to hire an assistant with a “yes,” but then added the word “discretionary.”

The final ruling was that Massicolli was not entitled to deduct the salary paid to his spouse in 2002 and 2003 as an employment expense.

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.