Count on the CRA to come back knocking when you ‘rent’ your partner

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With taxpayers in eight out of 10 provinces going through a 2024 high marginal private earnings tax fee exceeding 50 per cent, it ought to come as no shock that some {couples} are methods to earnings 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 high marginal fee of 53.5 per cent. If their partner or associate earns beneath about $55,000, their marginal fee is simply 22.7 per cent — a ramification of greater than 30 proportion factors.

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There’s a wide range of methods to legally cut up sure forms of earnings with a partner. For instance, on the subject of retirement earnings, pension earnings splitting or CPP/QPP sharing may be efficient. For buyers, utilizing a prescribed fee spousal mortgage 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 fee was just one per cent or two per cent. With that fee now at 5 per cent as of July 1, 2024, discovering an funding with a assured return in extra of that fee is difficult, which is why we’ve seen only a few new spousal earnings splitting loans arrange previously yr. 

However one technique of earnings splitting that’s usually tried, however doesn’t all the time move muster with the Canada Income Company, is to “rent” your partner or associate to both work in your online business or, when you’re an worker, to change into your “assistant.” Whereas this generally is a tax-effective technique when it entails legit work and applicable pay, the CRA is commonly fairly skeptical of spousal employment preparations, as one taxpayer lately came upon in a tax case determined final month. 

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Underneath the Earnings 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 Kind T2200, “Declaration of Circumstances of Employment.” The place an expense shouldn’t be explicitly required to be incurred by an worker of their employment contract, it may possibly nonetheless be deductible if it’s discovered to be an implied requirement. In making this willpower, the courts have reviewed whether or not the failure to satisfy this requirement might end result 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 kinds that potential purchasers might fill out to precise their curiosity in these merchandise. These kinds 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 shopper and put together a proposal. If it was accepted, the shopper signed a contract, and the taxpayer was entitled to a fee. 

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Throughout the years beneath overview, 2016 and 2017, the taxpayer reported employment earnings of roughly $80,000 and $90,000 respectively, of which about $33,000 every year was fee earnings. 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 varied appointments, and accordingly was paid for her providers as a self-employed contractor. Whereas the taxpayer admitted that she was not paid instantly, he acknowledged 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 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 might have included proof of funds, duties description, timesheets, worker log guide, T4 slips, and so on. The taxpayer did produce some documentation, together with a Kind T2200, in addition to joint checking account statements. 

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Throughout cross-examinations, the taxpayer admitted that he had not stored 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 “unusual 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, actually, “joint household bills indirectly associated to her.” As well as, there was no proof of any providers carried out by her, and the taxpayer couldn’t produce a log or notice guide or listing of shoppers 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 should be enough to ascertain the standing of his spouse as an impartial contractor, in addition to the quantities paid to her.  

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The Tax Courtroom choose 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 choose 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.

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