My name is Mark Goodfield and I am a tax partner and the managing partner of Cunningham LLP in Toronto. This blog is about income tax, business, the psychology of money and investing topics and is meant for taxpayers no matter their income bracket, but in particular for high net worth individuals and entrepreneurs who own private corporations. I also blog about whatever else crosses my mind; I have to entertain myself. This is my personal blog and the views and opinions expressed in this blog do not reflect the position of Cunningham LLP. I am blunt and opinionated (at least for a Chartered Professional Accountant). You've been warned.

The blogs posted on The Blunt Bean Counter provide information of a general nature and 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.

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.