As a small business owner, the income you pay to your employees is a deductible business expense. If you employ your spouse or common-law partner, you can also deduct this income as a business expense. However, you need to ensure you meet the Canada Revenue Agency’s requirements and that you report the information correctly.
Employing Your Spouse
If you want to deduct income you pay to your spouse or common-law partner as a business expense, your situation must meet certain conditions.
- Your spouse must do work that is necessary for your business.
- You must pay them a reasonable salary that is similar to what you would pay a person at arm’s length to you.
- Finally, you must actually pay your spouse.
Paying Your Spouse
As an employer, you need to register for a payroll account with the Canada Revenue Agency.
When you register, you will receive a 15-character account number as well as online access to a range of calculators and programs. These calculators and programs will help you understand how much income tax you should deduct from your partner’s income. Additionally, they will help you calculate the Canada Pension Plan contributions and Employment Insurance Premiums that you should deduct from your spouse’s pay cheque.
Finally, at the end of the year, you need to fill out a T4 slip for your spouse and give it to them.
Keeping Records
It’s important to keep records so that you can back up the claim that you paid your spouse. For example, if you paid your spouse with cheques, keep copies of the cheque stubs. Similarly, if you paid them in cash, have them sign a receipt noting that he received the cash.
Paying in Product
If you prefer, you may pay your spouse or common-law partner in product.
If you do, the CRA assumes that you have disposed of the product and requires you to report the value of the product as income along with your other sales from your business. However, the CRA also allows you to deduct the value of the product as a business expense.
When filing out the T4 slip, also note the value of the product as your spouse’s earnings.
For example, imagine you own a clothing shop and you pay your spouse in clothing. You give your spouse the equivalent of $400 worth of clothing. First, you must report the $400 as income, but you can also deduct the $400 as a business expense. Finally, you must note the $400 as earnings on your spouse or common-law partner’s T4 slip.
Completing Your Income Tax Return
When completing your income tax return, deduct the amounts you paid to your spouse or common-law partner as well as your other employees on line 9060 of Form T2125, Statement of Business and Professional Activities.