Jamie Golombek: Whereas spousal employment relationships will be professional, tax company will count on to see proof
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With taxpayers in eight out of 10 provinces dealing with a 2024 prime marginal private earnings tax charge 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 accomplice is in a a lot increased tax bracket than the opposite. Contemplate, for instance, a British Columbia high-income taxpayer dealing with a prime marginal charge of 53.5 per cent. If their partner or accomplice earns beneath about $55,000, their marginal charge is barely 22.7 per cent — a selection of greater than 30 share factors.
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There’s a wide range of methods to legally cut up sure kinds of earnings with a partner. For instance, in terms of retirement earnings, pension earnings splitting or CPP/QPP sharing will be efficient. For traders, utilizing a prescribed charge spousal mortgage to have any extra returns above the prescribed rate of interest taxed within the palms 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 earnings splitting loans arrange previously yr.
However one technique of earnings splitting that’s typically tried, however doesn’t at all times go muster with the Canada Income Company, is to “rent” your partner or accomplice to both work in your corporation or, when you’re an worker, to grow to be your “assistant.” Whereas this generally is a tax-effective technique when it entails professional work and acceptable pay, the CRA is usually fairly skeptical of spousal employment preparations, as one taxpayer not too long ago came upon in a tax case determined final month.
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Beneath 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 Situations of Employment.” The place an expense shouldn’t be explicitly required to be incurred by an worker of their employment contract, it will possibly 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 satisfy 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 a wide range of employment bills, together with motorized vehicle bills (which had been allowed) and quantities paid to his partner, which had 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 shoppers may fill out to precise their curiosity in these merchandise. These kinds had been collected, and calls had been made to qualify the possible purchasers. If certified, an appointment was scheduled. The taxpayer would then meet with the possible consumer 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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Through the years beneath evaluate, 2016 and 2017, the taxpayer reported employment earnings of roughly $80,000 and $90,000 respectively, of which about $33,000 annually was fee earnings. Among the many employment bills the taxpayer claimed had 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 providers 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 had 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 along with his partner, and did not 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 e-book, 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 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 had been for “strange family bills” and weren’t essentially particular to his partner. No deposits had been made to her private checking account.
The CRA’s place was that any quantities that had been alleged to have been paid to his spouse had been, in actual fact, “joint household bills circuitously 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 observe e-book or record of consumers allegedly contacted by her at any time in 2016 or 2017.
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The taxpayer argued that there was no want to provide an precise contract and that his testimony alone must be adequate to determine the standing of his spouse as an impartial contractor, in addition to the quantities paid to her.
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The Tax Court docket 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 had 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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