Considering Hiring Family to Help Run Your Business? Ensure you Understand CRA Requirements to Stay Compliant
Thinking of hiring your spouse to handle bookkeeping or your teen to help with marketing? While keeping business “in the family” sounds ideal, the Canada Revenue Agency (“CRA”) has strict rules that can turn good intentions into costly tax headaches if not handled correctly. Bringing family members into your business can be a great way to manage workload, involve your loved ones, and even introduce the next generation to entrepreneurship. However, when it comes to paying those family members, the CRA takes a close look to ensure everything is fair, reasonable, and compliant. Understanding these requirements is essential to protecting your business from reassessments and penalties.
Understanding the “Reasonableness Test” for Family Wages
When paying a family member through your Canadian business, the CRA applies what is commonly referred to as the “reasonableness test.” This determines whether the salary paid can be deducted as a business expense and whether the income received by the family member is recognized as legitimate.
For wages to meet this test, two main conditions must be satisfied:
- Genuine Work Performed:
Your spouse, relative, or other family member must have genuinely contributed to the business. This means that the role they hold and the tasks they perform are necessary and directly support your business. The position should have clearly defined responsibilities, and their work must provide real benefits to the company.
For example, if your spouse handles administrative work, manages invoices, or supports client communication, these duties should be documented and reflected in actual work records or deliverables.
- Market-Rate Compensation:
The salary paid to your family member must be in line with what you would pay a non-family employee for similar duties. You cannot inflate wages based on family ties or use the salary to improperly shift income to a lower tax bracket. Conducting a quick comparison with industry standards or local job postings can help demonstrate that your pay rate is reasonable and defensible.
Consequences of Paying Unreasonable Salaries
If the CRA determines that the compensation paid to a family member is excessive or not reflective of actual work performed, several tax consequences may arise. The CRA may deny a deduction for the portion of the salary it considers unreasonable. The income remains taxable to the family member who received it as employment income, but the corporation cannot deduct that unreasonable portion, effectively increasing its taxable income.
In more serious cases, if the CRA concludes that the payment conferred a personal benefit to a shareholder (for example, paying a shareholder’s spouse who did not actually perform work), CRA may assess a shareholder benefit under section 15(1) of the Income Tax Act. In that case, the shareholder, not the family member, may be taxed on the benefit.
The Benefits of Paying Family Members Reasonably
Despite the potential risks, there are many legitimate advantages to employing family members, provided you follow the CRA’s rules. When done correctly, it can help distribute income within your family, provide valuable experience to younger relatives, and even reduce your household’s overall tax burden.
To realize these benefits, ensure that compensation is reasonable, properly documented, and compliant with payroll rules. If you wouldn’t pay an unrelated employee the same wage for the same duties, it is a clear sign that the amount is too high.
Following these principles allows you to:
- Fairly compensate family members for their contributions.
- Reduce tax risks associated with unreasonable salaries.
- Maximize deductions available to your Canadian Controlled Private Corporation (CCPC) if applicable.
- Maintain credibility and transparency in the event of a CRA audit.
Tips and Tricks to Ensure CRA Compliance when Working with Family
- Keep Detailed Records for CRA Review
Documentation is your strongest defence in the event of a CRA review. Maintain written job descriptions, signed employment agreements, timesheets, proof of payments, and evidence of work completed. Also, note how you determined the wage, such as comparing to market rates or referencing online salary data.
- Ensure Payroll and Deduction Obligations Are Met
Even when employing family members, you must comply with standard payroll requirements — including remitting CPP, income tax, and, where applicable, EI. Always issue T4 slips and maintain a CRA payroll account. Treating family employees like any other staff member reinforces that the arrangement is legitimate and professional.
- Separate Family Roles from Ownership Roles
Family members who are both employees and shareholders must have clearly distinguished income sources. Employment income (for work performed) should be documented and paid through payroll, while dividends (for ownership) should be declared separately and reported on T5 slips. Avoid making mixed or irregular payments without clear documentation, as this prevents confusion and potential reassessments by the CRA.
- Periodically Review Compensation Levels
Business conditions change and so should pay rates. Review your family members’ salaries annually to ensure they remain in line with market standards and the level of work performed. Adjustments, if necessary, should be documented to show that you’re applying a thoughtful, consistent process.
- Seek Professional Guidance Before Hiring
Before bringing family members onto the payroll, consult a qualified accountant or tax advisor. They can help structure employment agreements, confirm reasonable wage levels, and ensure that all CRA requirements are met from the start. This proactive step can prevent significant tax issues down the road.
Final Thoughts
Hiring family members can strengthen your business, create new opportunities, and help build long-term financial stability for your household, as long as it is done properly. By understanding the CRA’s reasonableness test, maintaining thorough documentation, and ensuring payroll compliance, you can enjoy the benefits of a family-run business without the worry of unwanted CRA scrutiny.
If you are considering hiring a family member or already have relatives helping in your business, our team can review your current setup and help you navigate CRA rules confidently to ensure your family business stays compliant and continues to thrive for years to come.
***Disclaimer: This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.
Elias Zafiridis