Hire your spouse, cut your taxes: A legitimate deduction

National Post

2004-10-30



Feeling stressed out at work? Well, a happy marriage may be the cure, says
Heart and Stroke Foundation researcher Dr. Sheldon Tobe of Sunnybrook and
Women's College Health Sciences Centre in Toronto. Dr Tobe presented his
findings on Monday at the Canadian Cardiovascular Congress in Calgary. According
to Dr. Tobe, "spouses who enjoy each other's company actually modulate their
blood pressure down when they are together, away from work."

But, perhaps a spouse could be more helpful in reducing your stress if you
could actually hire him or her to do your work. In fact, by doing so, you may
even be able to reap some tax advantages at the same time by shifting some of
your income to the hands of a lower-income spouse.

While business owners often employ their spouses or other family members to
assist them in their businesses, the ability for employees to hire others to do
their work and pay them a tax-deductible salary is much more limited. A tax case
decided earlier this month specifically dealt with the ability of an investment
advisor to deduct a salary paid to his wife.

In the years in question, Grant Schnurr was a successful investment advisor
with a major brokerage firm. Mr. Schnurr hired his wife as his assistant and
paid her a reasonable salary, being sure to make the appropriate payroll
deductions. Mrs. Schnurr's role was to perform various secretarial duties with
respect to Mr. Schnurr's clients' records as well as to handle the annual
Christmas card mailing and to purchase gifts for clients. She also engaged in
various business development activities in the community to help attract new
clients.

The judge in no way questioned the genuineness of Mrs. Schnurr's employment
by her husband and found that her salary was reasonable in relation to the
services that she performed, saying that "the amount paid to Mrs. Schnurr in the
overall context of the high income and substantial business generated by Mr.
Schnurr is, in fact, rather modest."

The main issue in the case was the Income Tax Act's rules governing the
deductibility of salaries paid to an assistant by an employee. To be able to
deduct the cost of an assistant's salary, an employee must be "required" by the
contract of his or her employment to pay for an assistant.

While Canada Revenue Agency's administrative position is that the term
"required" means that there be an "express requirement within the terms of a
written contract of employment," the CRA acknowledges such a requirement can
still exist if the employee can establish that it was "tacitly understood" by
both parties -- the employee and the employer -- that the payment must be made
and was necessary, under the circumstances, to fulfill the duties of the job.

The CRA argued that the employment letter between the brokerage firm and Mr.
Schnurr was silent about the hiring of an assistant and therefore, it was not
"required." The judge disagreed and found Mrs. Schnurr's salary to be fully tax
deductible, concluding that it is "implicit in the relationship with [his
employer] ...that if Mr. Schnurr is to generate the sort of business...that [his
employer] expected him to, he is required to hire someone to perform the type of
services that his wife performed. Such a provision need not be explicitly set
out in the agreement between the employer and the employee."

So, not only can your spouse provide you with relief from stress, he or she
may be able to provide you with some tax relief as well.

GRAPHIC: Black & White Photo: (Newlyweds on wedding cake).