Paying Wages to Farm Family Members

Agdex#:	823
Publication Date:	January 2007
Order#:	07-003
Last Reviewed:	May 2007
History:	(Replaces OMAFRA Factsheet Paying Wages to Farm Family Members, Order No. 06-063)
Written by:	B. Rawn/OMAFRA; G. Mawhiney/OMAFRA

• Paying wages to children or spouses for documented work on the farm is a tax deductible expense to the farm business. Splitting the total business income among family members may reduce the family’s total income tax bill.

• Canada Pension Plan (CPP) premiums are paid by all individuals who are 18 years of age or older and who are not already collecting CPP benefits, provided their total annual earnings exceeds $3,500. Individuals then become eligible for the retirement and disability benefits provided by the Canada Pension Plan.

• The family’s interest in the farming operation may increase because of the monetary recognition of their efforts. Children can establish savings to assist with financing their education, buy a home, or to acquire an ownership share of the business.

• Regular payments of wages to family members can replace ad hoc year-end tax reduction strategies such as pre-purchasing inputs or machinery.

• A spouse, child or individual under 69 years of age with earned income from wages or salaries can open a registered retirement savings plan (RRSP) and contribute to the plan. There is no minimum age limit on RRSPs. If the plan is started early in a child’s life, funds from tax-sheltered growth in the plan can help provide for their education or establishment in business, or may be allowed to grow until retirement.

• A spouse, while employed in the farm business, who hires someone to look after children under 14 years of age, can deduct child care expenses. Related persons can be hired as child-care givers, provided the caregiver is over 18 years of age.

Disadvantages

• The amount of paperwork and record keeping will increase.

There are added payroll expenses for the employer, such as federal Canada Pension Plan and Employment Insurance premiums as well as provincial Workplace Safety and Insurance Board and Employer Health Tax premiums.

• Paying wages to family members may affect their eligibility for individual tax credits such as the Child Tax Credit.

• Funds paid out in the form of salaries and bonuses will no longer be available for use in the business unless the funds are borrowed back from the wage earner.

• Keep a monthly payroll ledger with detailed information on date of pay period, hours of work, gross pay, taxable benefits, CPP contributions, EI premiums, income tax, advances, deductions, net pay and amounts remitted to Canada Revenue Agency taxation.

• Provide a monthly payroll transaction summary slip to employees with their pay cheques.

• Submit the monthly remittance on form PD7AR to Canada Revenue Agency Taxation. (Due by the 15th of the following month).

At year-end:

• Complete an annual payroll summary from the monthly payroll ledger records.

• Complete T4 Supplementary slips for all employees before February 28 of the following year.

• Submit T4-T4A Summary to Canada Customs and Revenue Agency Taxation. This is a summary of all remuneration paid to all employees.

• Complete and file year end summary with the Workplace Safety and Insurance Board.

• Complete and file payroll summary with Employer Health Tax, (section of Ontario Ministry of Finance).

• Farmers using computers to calculate payroll deductions should refer to Canada Revenue Agency’s publication Machine Computation of Income Tax Deductions, Canada Pension Plan Contributions and Employment Insurance Premiums (MC tables).

Payroll Deductions

Canada Pension Plan (CPP)

Employee premiums are based on a percentage of the employee’s earnings and are matched by the employer.

Salary, wages or other remuneration, commissions, bonuses and the value of board and lodging (other than exempt allowance for special or remote work sites) are subject to Canada Pension Plan contributions.

Premiums are not required for:

• individuals under the age of 18 or over the age of 70
• agricultural workers who earn less than $250 and work less than 25 working days in a calendar year
• employment where no cash remuneration is paid

| Top of Page |

Employment Insurance (EI) Premiums

The Employee’s Premium is based on a percentage of insurable earnings to an annual maximum.

The Employer’s contribution is 1.4 times the amount of the employee’s EI premiums to an annual maximum per employee. Employee and employer premiums are required for any individual earning insurable employment income. All employment in Canada, under a contract of service, is insurable employment unless otherwise accepted.

• for employment in agricultural enterprises of less than 7 working days in a calendar year or the person receives no cash remuneration
• for employment by a corporation of a person who controls more than 40% of issued voting shares
• where the family member is an independent contractor working under a contract for service
• where the family member is not dealing with you at “arm’s length” and is not working under a valid employee/employer relationship
• employment that is an exchange of work or services

1. If I hire someone for a few days a year to help with seeding or harvest, do I need to deduct CPP and EI?
   
   

   No. CPP premiums do not have to be made for employees hired for less than 25 working days in a calendar year.
   
   EI premiums do not have to be deducted for employees who work less than seven days in a calendar year.
   
   Arrangements do have to be made for Workplace Safety and Insurance Board coverage and contributions for the Employer Health Tax.
   
   

2. Can I pay my spouse or child’s salary once at the end of the year?
   
   Yes, this is possible, provided the payment is actually made and deductions are remitted as required. Don’t expect to be able to decide how much you should have paid after the 12 month business year has expired. It is important that you have a written agreement on file detailing the job specifications, including salary levels.
   
   
3. Should I pay my employees by cheque?
   
   
   Yes. Payments should be by cheque and made out for the end of time period covered, i.e., weekly or monthly. The cheque should be deposited in the employee’s bank account to indicate the recipient has control over the funds.
   
   
4. What if the farm business can’t afford to pay its family members their salaries?
   
   
   An alternative is to pay the spouse or child the usual salary and have them lend the money back to the employer with a properly documented demand note.
   
   An actual cash transaction must take place where the employee receives the money and then lends it or invests it back into the business.

5. What if I don’t like to or don’t have time to keep payroll records?
   
   
   As an employer, you do not have to physically do the records yourself. Accountants or tax filers can help you with payroll deductions. They can help you with the initial calculations and you can complete the monthly procedures yourself, or you can hire them to do all the work related to payroll. However, it is the responsibility of the employer to maintain payroll records for tax purposes and under the provincial Employment Standards Act. (You can also get instructions from the Record of Employment specialist at your nearest Service Canada Centre).
   
   
6. What if I pay my employees in kind rather than in cash?
   
   
   Payments to employees in kind rather than cash are treated as “non-cash benefits”, which are taxable. The fair market value of the payment in kind given to the worker is a benefit to the individual that must be reported on a T4A slip. These benefits are not pensionable and not insurable by the employer, therefore no CPP and EI deductions are required by the employer.

7. What if I hire someone on contract, do I need to make payroll deductions?
   
   No. If the contract labourer is a self-employed worker who is contracted to do a certain job, it is only necessary to pay their contracted job cost. Custom operators must provide a Clearance Certificate issued by the WS&IB or you the employer are responsible for the WS&IB premiums. The CRA has developed a booklet explaining how to determine whether someone is actually an employee or self employed. This is a very important determination and greatly impacts on things such as EI and CPP contributions. This booklet is available by contacting your nearest CRA office and asking for publication RC4110 (E) Rev 06.
   

8. When deciding on salary levels for spouse and children, what is reasonable?
   
   
   Salaries or wages must be of a reasonable amount based on the extent and type of work performed by the family member. Consider what you would pay a non-family member to do the same work. Minimum wage guidelines apply here.
   
   
   
9. If my spouse is currently paid as an employee is there any problem in them becoming a business partner later on?
   
   
   There is generally no problem changing from an employee to business partner as long as you can document to Canada Revenue Agency how the former employee’s shares or partnership interest in the business have been acquired or accumulated.

10. If I pay my family members (children, spouse) does my operation come under the Occupational Health and Safety Act (OHSA) or is there an exemption for immediate family members?
    
    
    There is no exemption. If you have paid workers (money is exchanged for work) then your operation falls under OHSA.
    
    
11. Can my spouse, as a farm employee, in turn hire her mother to look after our young children and deduct the personal childcare expenses while working for me in the farm business?
    
    
    The spouse with the lowest income may claim child care expenses. When the care giver is “connected”, the connected person must be 18 years of age or older and not claimed as a dependent by the employer. In the case of your spouse hiring your mother-in-law, child care expenses would be deductible in most situations.