Do you hire your kids to help out in your practice? Do your small-business-owner clients income-split by paying their kids a salary for work performed?
If the answer to either of these questions is yes, a recent Tax Court of Canada decision (Bruno v The Queen, 2012 TCC 316) may be of interest.
In 2003, Teresa Bruno and her husband began a business, Shades N Shutters, specializing in custom window coverings. The business was owned by Ms. Bruno. Her husband provided services to Shades N Shutters as an independent contractor.
The Brunos’ two children, age 15 and 13 in 2007, helped out with the business on weekends and on holidays. The younger child did “less skilled tasks such as cleaning and answering phones,” while the older child did mainly clerical work.
In 2007, Ms. Bruno reported business income from Shades N Shutters totalling nearly $12,000. The following year, she reported a business loss of almost $17,000.
She tracked the hours worked and the wages earned by her kids. They were paid between $10 and $12 per hour. According to her summary, the children generally worked store hours on Saturdays and Sundays in 2007.
This was reduced to one weekend day in 2008 because the business wasn’t doing as well that year. In both 2007 and 2008, the children worked on holidays.
When calculating her 2007 and 2008 income for tax purposes, she deducted $18,000 and $7,000, respectively, for wages paid to her two children.
Deduction denied
CRA reassessed her and, among other things, disallowed the deduction of the kids’ wages from her business-income calculation.
While the CRA often takes issue with the amount of wages paid to minor children, that was not the case here. The issue was that, rather than paying the children by cash or cheque, Bruno paid for the children’s personal expenditures in amounts equivalent to the wages earned.
She did this on the advice of her accountant, who said, while she couldn’t deduct any expenses associated with the children’s basic needs, she could claim a deduction for “luxury items.” According to Bruno, the expenditures were luxury items—things the children chose to buy out of the wages they earned.
Under the Income Tax Act, in order to deduct an amount as a legitimate business expense, however, the expenses must be incurred for the purpose of earning income.
The CRA argued the luxury expenditures were not deductible because they were “personal or living expenditures of Ms. Bruno, and the children did not have sufficient discretion over the funds.” While Bruno retained the right to veto any of the kids’ purchases that were inappropriate, she rarely did so.
Bruno maintained the expenditures were not personal because she would not have purchased these luxury items for her kids unless they earned the money to pay for them. The judge wasn’t convinced, finding the expenditures had both business and personal elements—in other words, Bruno would have also gained from them.
What’s happened before
Prior jurisprudence has concluded that if you incur an expense for the purpose of producing income from a business, CRA won’t deny the deduction just because it also personally benefits you.
The judge said that if the children were indeed owed reasonable wages for the work performed, Bruno could have claimed a business expense even if these wages were paid by way of purchasing luxury personal items chosen by the children.
In this case, however, Bruno didn’t provide sufficiently detailed evidence to prove she bought the items for her children’s benefit only, and that they were all luxury items.
Lucky for Bruno, in the end, the judge didn’t deny the wage expense entirely. He allowed a 50% deduction of the amounts Bruno had originally claimed.
If she had kept proper records, she may have been entitled to claim all her expenses—something to keep in mind if you or your clients employ children in their businesses.