Does your spouse or child count as a small business tax deduction?
Many small business people recruit their family members as workers as a matter of course. In terms of income tax, this makes your child or spouse an employee, and a business tax deduction. If you've employed your child or spouse, you can deduct his or her salary as a business expense, just as you would the salary of any other employee (and report the salary on a T4 slip, of course).
But the full answer to the question of whether or not the spouse or child you employed in your business last year qualifies as a income tax deduction depends on whether or not you have met the CRA's conditions.
If you're going to deduct your family employee as a business expense, you must:
- pay the spouse or child a salary,
- pay the same amount of salary that you would pay someone else to do the job,
- pay a salary that is reasonable for the child's age,
- and the spouse or child must be doing work that is necessary for earning business or professional income.
ALL of these conditions must be met before your child or spouse is considered a legitimate employee for income tax purposes.
Receipts always matter, so if you pay your spouse or child by cheque, keep the cancelled cheques for your records.
You may pay your child or spouse with a product from your business instead of cash, if you wish. If you do, then you would claim the value of the product as an expense in your income tax, and add to your gross sales an amount equal to the value of the product, while your child or spouse would include the value of the product in his or her income.
For more information about treating your spouse or child as an employee, see the Salaries, Wages, and Benefits section of the CRA's Business and Professional Income Guide.
The next page of this article deals with other income tax deductions that apply to small businesses, such as income tax deductions relating to advertising, legal and accounting fees, and the "other" or miscellaneous category of income tax deductions. Click to continue reading.
