When Married Couples Run Businesses Together

Running a business with your spouse allows you to spend more time together, and it ensures you are running your business with someone you know and trust. However, the situation can also be stressful for many couples, and it can be confusing from a tax perspective.

If you and your spouse are running a business together, it may be considered a partnership. In order to qualify as a partnership, both of you must contribute to the business, and you can define your partnership in writing or with a verbal contract.

If your partnership has an absolute value of more than $2 million or has more than $5 million in assets, you must file a T5013 Partnership Information Return. In most other cases, you may simply file your own returns as self-employed individuals.

To file your taxes as self-employed individuals, both you and your spouse must complete Form T2125, Statement of Business or Professional Activities. Ultimately, you transfer information from this form to lines 135 to 143 of your tax return, which are devoted to self-employment income.

You may also write off expenses incurred to operate your business. Those expenses may include start-up costs, accounting fees, inventory purchases, office or storefront rent, insurance and many other fees related to running your business.

Make sure you only claim income and expenses from your partnership once. Decide which percentage of your income and expenses each person should claim and declare the corresponding amounts on your tax return.

For example, if your partnership has $100,000 of income, you do not each need to declare that amount of money. Instead, you must split the income between the two of you in the manner that best represents the structure of your business.

If your business sells taxable services or items and it collects more than $30,000 per year, your business is obligated to charge and remit GST/HST. These payments are separate from your tax return. You must register for a business number and begin to report GST/HST payments on behalf of your partnership.

In order to register, you or your spouse may complete and send in Form RC1, Request for a Business Number (BN). Alternatively, you may register online with through the CRA’s Business Registration Online service. This service allows you to view and pay GST/HST payments, and as your business grows, you can also use your BRO account to track payroll and import-export taxes.

If your partnership is a GST/HST registrant and you paid GST/HST on qualifying business expenses you deducted on your tax return, you may apply for a GST/HST rebate. To file for this rebate, fill out Form GST370, Employee and Partner GST/HST Rebate Application.

Although you pay GST/HST on behalf of your partnership, you or your spouse may have to claim the rebate on your personal self-employed tax return. If you receive a rebate, remember to report the rebate as income on your tax return in the year you receive the rebate.

When you file as a self-employed individual due to a partnership with your spouse, the CRA doesn’t just check the numbers on your return with the numbers on your T4 slips as they do with traditional employees. Instead, the agency looks for other audit triggers.

The agency looks at variances between years, clues that you may be failing to report cash payments and erroneous income splitting in addition to a range of other triggers. Income splitting is when a couple splits the income of one person and transfers it to the other person to lower their overall tax burden.

When you have a partnership, you are not income splitting, but you also have to be sure that both people are contributing to the business. If the CRA suspects that you do not have a true partnership but rather that one person works while the other doesn’t contribute anything, the agency may notice the income splitting and audit you.

Under Canadian law, if you get a divorce, all of the assets acquired during the marriage must be split equally. If someone brought an asset to the marriage, any increase in that asset’s value must also be split equally.

If you run a business with your spouse, you should consider what happens to your business in the event of a breakup. In some cases, you may opt to continue running the business together with the same percentage of partnership as you originally established. Alternatively, one person may opt to buy the other person out, or you may opt to sell the company and split the proceeds.

Many of these options have tax implications. For example, if you sell your business, you may have to declare capital gains income. To be on the safe side, you may want to create a post-breakup financial plan for your business.