If your small business comes under audit by the CRA for salaries paid to your spouse and/or children, it is pertinent that you have well-kept records showing that the income they have earned is reasonable and justified. Not having the proper documentation and being unable to prove that the related employees earned their pay can lead to additional taxes, and possibly penalties, owed to the CRA.
The CRA will compare the duties performed and pay received by your family member to that of someone at arm’s length to you, or a non-related employee. For example, a large red flag for the CRA would be full-time salary paid to your spouse for work that be completed by a part-time employee, or payments made to children who are away at school full-time. Review of detailed records showing the duties performed by the family member, timesheets itemizing the amount of time worked, and copies of type and amount of payment made should provide adequate support that income earned is considered reasonable and justified by the CRA. The key to getting through a payroll audit by the CRA is well-kept, organized, and detailed records of payment and jobs held by the family member-employees.
The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax accounting services information. Call Marlies Y Hendricks, CPA at 416-766-3941 to discuss your best options and set up an appointment.