Family Business Expenses Denied

On November 30, 2009, the Tax Court of Canada released its judgment in Massicotte. The case involved the taxpayer and her brother who jointly owned rental property in Toronto. In the 2004 and 2005 taxation years, the taxpayer claimed a deduction for salary paid to her two sons; the taxpayer paid each son $7,500 per year, with the majority of it paid into RESPs for their benefit. The taxpayer paid the amounts to her sons for odd-jobs around the rental property – garbage removal, snow removal, yard work, etc. The Tax Court allowed only $500 of the $7,500 to be deducted in the taxation years for each son. Justice Boyle of the Tax Court made his decision on the following basis.

First, the amount paid to the sons was unreasonable, given the age of the sons, the hourly wage paid to the sons, and the amount of time that was required to earn the amounts in question. The Income Tax Act only allows deductions that are reasonable, with the unreasonable portion considered non-deductible (although the full amount may be considered income for the recipient). The balance of the amount was considered to be a personal expense, which is not deductible.

Second, the taxpayer`s evidence at trial was less than satisfactory. The only documentary evidence that was provided were year-end receipts from the sons acknowledging that they received the full $7,500 in the year. However, the taxpayer was unable to produce any other evidence establishing the actual jobs performed, and the dates and time worked by the sons.

These are two common pitfalls that family businesses face when the Canada Revenue Agency (CRA) questions the deductibility of salary paid to relatives (or any non-arm`s length party). Had the taxpayer kept better records at the time, she likely would have been more successful at the Tax Court. One simple method would have been for the taxpayer to have kept a log of the time worked, given that the boys were paid on a hourly wage.