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

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

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There’s quite a lot of methods to legally break up sure varieties of revenue with a partner. For instance, in terms of retirement revenue, pension income splitting or CPP/QPP sharing might be efficient. For traders, utilizing a prescribed rate spousal loan to have any extra returns above the prescribed rate of interest taxed within the arms of the lower-income partner was the best way to go when the prescribed charge was just one per cent or two per cent. With that charge now at 5 per cent as of July 1, 2024, discovering an funding with a assured return in extra of that charge is difficult, which is why we’ve seen only a few new spousal revenue splitting loans arrange previously 12 months. 

However one methodology of revenue splitting that’s usually tried, however doesn’t all the time move muster with the Canada Revenue Agency, is to “rent” your partner or associate to both work in your corporation or, should you’re an worker, to turn into your “assistant.” Whereas this generally is a tax-effective technique when it includes authentic work and acceptable pay, the CRA is usually fairly skeptical of spousal employment preparations, as one taxpayer just lately came upon in a tax case determined final month. 

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Below the Revenue Tax Act, an worker is permitted to deduct any “wage” paid to an assistant supplied 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 will not be explicitly required to be incurred by an worker of their employment contract, it could actually 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 fulfill this requirement may outcome within the worker’s termination, a poor efficiency analysis or different disciplinary motion on the a part of the employer. 

The newest tax case coping with spousal employment concerned a commissioned worker who wrote off quite a lot of employment bills, together with motorcar 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 comparable 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 types that potential purchasers may fill out to precise their curiosity in these merchandise. These types have been collected, and calls have been made to qualify the potential purchasers. If certified, an appointment was scheduled. The taxpayer would then meet with the potential consumer and put together a proposal. If it was accepted, the client signed a contract, and the taxpayer was entitled to a fee. 

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Throughout the years underneath assessment, 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 immediately, 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 together with his partner, and didn’t submit every other 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 Type T2200, in addition to joint checking account statements. 

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Throughout cross-examinations, the taxpayer admitted that he had not saved any data 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 “strange 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, in truth, “joint household bills in a roundabout way 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 notice ebook or listing of consumers allegedly contacted by her at any time in 2016 or 2017. 

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

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The Tax Courtroom decide rejected these arguments, and agreed with the CRA as there have been no books and data and no supporting documentation to again up the taxpayer’s assertion that the quantities claimed on his return have been incurred or truly 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 Non-public Wealth in Toronto. Jamie.Golombek@cibc.com.

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