As a small business owner, you can deduct salaries you pay to employees as a business expense and this rule applies even if you employ your own children. However, the Canada Revenue Agency has certain expectations regarding child labour. It’s important to ensure you understand and adhere to them.
Hiring Your Child
- In order to deduct wages you pay to your child as a business expense, you must pay your child — you should not claim this deduction if you don’t actually pay your child.
- Additionally, the work your child does must be necessary for earning business income. For example, your child needs to do something that supports your business — you cannot simply pay your child for household chores and claim it as a business expense.
- Finally, the salary must be reasonable and should be the same amount you would pay someone else to do the same job.
Paying With Product
You do not have to pay your child cash. Instead, you can pay him with product from your business.
If you pay your child with product, you should report the value of the product as a business expense.
For example, if you own a computer repair shop and pay your child by giving him a computer, you should claim the value of the computer as the amount you paid your child. However, you also need to add the value of the product to your gross sales.
In this example, imagine the computer is worth $300. The CRA requires you to report its value as part of your gross sales, meaning you should include it in your income. However, you also get to deduct the same amount as a business expense. This accounting method has exactly the same effect on your income tax as selling the product and paying your child in cash would have.
Remember your child should include the value of the product in his income when he completes his income tax return. However, your child may not need to file an income tax return. As of 2019, the basic personal amount is $12,069 — most individuals who earn less than this amount do not have to pay income tax or file a return.
Keeping Records
The CRA requires you to keep accurate and detailed business records.
If you employ your child, you need records of paying him. If you pay him by cheque, keep a copy of the cheque stub, and if you pay your child in cash, have him sign a receipt.
Issuing T4 Slips
If you employ your child, you must issue him a T4 slip as you would for any other employee.
Depending on the number of hours your child works and several other factors, you may need to withdraw Employment Insurance from his earnings. If you are unsure, the CRA can help you decide.
However, you do not need to deduct Canada Pension Plan contributions unless your child is over age 18.
