SALARIES TO FAMILY MEMBERS: Amounts Paid Must be Traceable

16 Nov SALARIES TO FAMILY MEMBERS: Amounts Paid Must be Traceable

Oftentimes, family members of the owner of a business will work for the business. However, these arrangements can be somewhat informal, and amounts paid may be denied as a business expense if the work performed and amounts paid to the worker are not properly documented.

A June 10, 2021 Court of Quebec case provides one such example of this issue. An individual (P) owned and operated a corporation (Pco) that provided trucking services. Pco deducted $46,000 over three years for amounts paid to P’s father-in-law and mother-in-law for filing and driving services. Pco also deducted approximately $11,000 over two years for payments to P’s spouse for filing services. P was assessed with income on all of these amounts.

The Court reviewed whether Pco actually paid the amounts to the family members.

Taxpayer loses

The taxpayer argued that, while P’s father-in-law and mother-in-law never cashed the cheques provided by Pco, these payments represented their contributions to household expenses. However, the Court found that the amounts were never paid.

All payments to P’s spouse were made to a joint bank account with P, but the payments did not specifically correspond with the amounts P’s spouse was allegedly paid for her services. P argued that funds from the joint account (reflecting her compensation) were used to pay off P’s spouse’s credit card bills. Again, the Court found that no payments were actually made to P’s spouse.

The Court noted that it believed P’s spouse did provide services and that the result would have been different if the bank statements had shown amounts paid directly to her for her services.

As no payments were determined to have been made to P’s spouse or his in-laws, no amounts were permitted to be deducted. Further, the Court determined that these assessments could be made outside the normal reassessment period and that the assessed gross negligence penalties were justified.

ACTION ITEM: Family members should be paid for work done for the business in the same manner as other non-family members.