My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a tax partner and the managing partner of Cunningham LLP in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog do not reflect the position of Cunningham LLP. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Wednesday, April 13, 2011

Employees Hiring a Family Member as an Assistant- Some Considerations

Tim Cestnick recently wrote an article in the Globe and Mail entitled “Little-used deduction could shave dollars from your tax bill”. The gist of this article was, that if you as an employee, negotiate with your employer the requirement to hire an assistant, obtain a Form T2200 from your employer and then proceed to hire a family member as your assistant, you can income split with the family member who performs the assistant duties.

In the article, Tim makes reference to the court case, Longtin v The Queen (2006). Tim mentions that Mr. Longtin’s wife performed many tasks, including taking phone calls, replying to email and faxing documents. I think by referencing the duties performed by Mrs. Longtin, Tim is correctly implying that in order to undertake this type of planning, your spouse or other family member, must actually perform certain tasks. It is thus imperative, that if you undertake this type of income splitting, the family member must actually perform the tasks and duties an assistant would be expected to carry out. In addition, it is also extremely important that the compensation for these tasks and duties must be “reasonable” in the circumstances. The Canada Revenue Agency ("CRA") and the Tax Courts have generally accepted that what is “reasonable” is what you would otherwise pay an arm’s length third party to perform the same duties.

I am not as optimistic about this strategy as Tim. I would suggest that most employers will outright dismiss any attempt to negotiate an assistant requirement into an employment contract unless; this is a requirement of the job in the first place. Employers are loathe to take any position that the CRA may challenge or audit, especially when there is no direct benefit to them. Notwithstanding the Longtin case, many employers were burned by a prior income tax fad, namely turning employees into contractors, and they have become gun-shy in relation to employee income tax planning.

Finally, it has also been my experience that if you hire a family member as an assistant, the CRA may actually interview your spouse or child, and ask them to describe in detail the duties they provide. This type of pressure may create problems in one of two ways:     (1) If the family member has not necessarily performed all the duties they were hired to undertake; she/he may feel pressure to embellish their assistant duties and/or may not really be able to explain their duties properly; or (2) she/he may be uncomfortable being interviewed, may not know how to handle themselves with a CRA auditor and depending upon the answers given and the manner in which she/he carries him or herself may cause more harm than help to your position.

Tim has provided an interesting income tax planning nugget, however, I would suggest that anyone contemplating taking this position, understand the documentation requirements and implications in doing such.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

4 comments:

  1. I'm glad you posted a response to his article. He makes it sound like it's a tax strategy that should be used more, but isn't.

    In reality it sounds more theoretical than anything else.

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  2. Thanks Mike. The strategy is valid and probably could be utilized a little more than it is. I think maybe the word is practical instead of theoretical. Practically speaking, I think the strategy really has limited application when you take into account some of the aspects I noted in my blog.

    Most notably, I don’t see very many employers going out on a limb to agree to the assistant condition. Many of our clients can't even get their employers to sign a T2200 for their car expenses, let alone an assistant. However, Tim may disagree.

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  3. Hi there! Good Tip. Can you explain more about how employers would have gotten "burned" by hiring employees as contractors?
    Thanks,
    ~Katie

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  4. HI Katie

    Employers were "burned" because the CRA in many cases determined individuals the company considered self-employed contractors were employees and the company's were responsible for CPP, EI, WSIB and the related penalties for not remitting such.

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