Income Splitting with Minor Kids

Income Splitting with Minor Kids

Splitting Income with Minor Kids to Save Taxes

One way to reduce your taxes is to split income with your family. This is one of the popular tax planning strategy. Under this strategy, you hire your children and pay them salary which is deductible to your business as long as wages are reasonable in relation to the services they have provided. CRA checks the reasonability of the amount in terms of what would you pay to an arm’s length party for similar job.

Some of the jobs that a kid can perform including:

–          Cleaning office

–          Washing automobile

–          Mailing letters

–          Products delivery

–          Data input

In some cases these expenses can be denied by CRA.  In one of Tax Court Case Bradley v The Queen, TCC 2006 500), CRA challenged the expenses. In 2001, Nancy Bradley, employed her daughter who was 8 year old and her son Mathew who was 12 years old. She paid them salary $2,000 and $5,000 respectively. Nancy claimed these payments as salary expenses on her taxes. CRA said these payments were not based on the duties they performed or the hours they worked and lastly, they are not reasonable, therefore, CRA denied these expenses. Nancy and kids said these are legit and payments were made however, judge ruled in the favor of CRA since mom had the control over funds withdrawal and kids did not have full control over the funds. So a lesson we learned is:

–          Payments should be reasonable

–          Work description should be in place ….. what they did

–          Working hours record should be maintained

–          A separate bank account should open under the kids name on which they should have a sole discretion to withdraw the funds

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