Many customers ask how they can safely use family members as "distribution points" to reduce their company's overall tax burden. Depending on your company's configuration (commissioned sales, sole proprietor, corporation), there are many safe, efficient money-sharing strategies. Here are a few:
Commissioned sales
A change to the T2200 form will generate immediate benefits to employer and employee, with no legal or financial risk.
When filled correctly, the T2200 will allow for the cost of an administrative assistant to be deducted from the employee's income. This benefits the employer by increasing customer face-time (more sales per employee), and it benefits employees by significantly reducing their tax burdens.
The assistant can be a spouse or older child. Presuming they have nil or minimal income, the amount paid for administration services generates a $0 tax implication for them. Of course, you must take the necessary steps regarding consultant/contractor agreements and ensuring a track record of regular payments to your relative. Canada Revenue's favourite hunting ground is a single cheque to a family member for an entire year of work. This expense claim can be denied if not prepared correctly. From a tax preparer's point of view, without a contract and track record of payments, it is impossible to defend.
Sole proprietor
The ability to involve family members in this configuration is almost unlimited. Family members can work as consultant/contractor to fill any role needed. As long as the family member is age appropriate and the role is reasonable, your imagination is the only limit to how they can provide a beneficial service to the company.
It is never a good idea to pay a five-year-old for a position. You have no chance of defending a child's experience, training or insight into the job. Deductions of this kind result in denial of expenses and multi-year audits.
Each province has different acceptable age requirements for consulting income. If an underage family member is providing a valid service, written approval from the province's Ministry of Finance is required.
Corporations
This configuration offers additional unique income distribution possibilities. But keep in mind that individuals often make the mistake of incorporating when it is more beneficial to remain a sole proprietor. The high costs associated with incorporation are not always offset by a lower tax rate.
For example, if an individual making $150,000 forms a corporation, there is no tax benefit at this level of income to offset the significantly higher bookkeeping and tax filing costs.
But if being incorporated is beneficial to you, one of the key features is the ability of shareholders to receive dividends.
Dividends are the least taxed form of income in Canada. If you configure your shareholder registry correctly, you will be able to give out after-tax profits to any shareholder, in an amount that is beneficial to them.
In Canada, there is no age restriction for shareholders. This means your two-year-old child can be a shareholder in your corporation and receive dividends with a $0 tax implication.
The most common mistakes are issuing the same class of shares to all family members or making all shares voting or non-voting. Configure your shares correctly and your corporation will not only allow flexible and specific dividend payments to each individual named but will also create a provable track record that immediately negates "tax avoidance" reassessments.
There is so much you can do to keep your money. If all you are hearing from your advisor is how to involve family members as employees, or you haven't been told to get a GST number for each person participating in your family business, run to a new advisor. •
Dalton Green is founder of Green Financial Online Inc.
Tel: 778.870.4829 (4TAX), email [email protected] or go to www.greenfinancialonline.com
