Paying Wages to Farm Family
Members
Table of Contents
Introduction
Paying wages to family members involved in an agricultural business
is an excellent way to recognize their efforts, instill a sense
of participation and formalize their role within the family business.
Farm families may also be able to boost their after-tax family income
by paying farm business wages or salaries to family members. The
employment relationship of the individual receiving the wage must
be genuine. The person must enter into a valid employment contract
and must contribute to the business.
Assuming this is the case and the employment relationship can be
documented, paying wages to family members with a lower marginal
tax rate than that of the business owner can result in overall tax
savings to the family.
Potential tax savings is one benefit. But the largest payoff is
in recognizing the important role played by all members of the family
involved in the business.
A contact list for relevant government agencies is available at
the end of this Factsheet.
Advantages Of Paying Wages To Family
Members
- 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. Young adults
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.
- With no minimum age limit, anyone under 69 years of age with
earned income from wages or salaries can open and contribute to
a registered retirement savings plan (RRSP). If a plan is started
early, the tax-sheltered growth can help pay for an education
or a business or be left in the plan to grow until retirement.
- While employed in the farm business, a spouse who hires someone
to look after children under 14 years of age can deduct childcare
expenses. Relatives can be hired as child-care givers, provided
the caregiver is over 18 years of age.
- When paying family members for work performed, you must be
able to show that they actually did the work and the wages paid
are "reasonable in the circumstances" in order for the
payment to be tax-deductible.
- Paying wages to lower income family members takes advantage
of lower tax brackets and personal tax credits which reduces the
overall taxes paid by the family.
- If they become disabled and cannot work, they could be eligible
for the CPP disability pension.
- Since your family members do not deal with the farming business
at arm's length, there may be no requirement to withhold Employment
Insurance (EI) from their wages. You can request a ruling from
the CRA to have it determine if the employment is insurable.
Disadvantages
- The amount of paperwork and record keeping increases.
- There are added payroll expenses for the employer, such as federal
Canada Pension Plan and Employment Insurance (EI) premiums as
well as provincial Workplace Safety 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.
First Time Employers
Hiring people for a farm operation, whether family members or not,
requires accurate records to track hours of work and calculate and
payroll deductions. First time employers must:
- obtain an employer number
- register with the Workplace Safety Insurance Board.
Apply to a Canada Revenue Agency (CRA) District Taxation office
to obtain an employer and receive an employer's kit, which includes
tax tables, Canada Pension Plan and Employment Insurance tables,
and personal tax credit return (TD-1E) forms.
Additional contact information is available at the end of this
Factsheet.
Paperwork Required
To start:
- Obtain an employer registration number from the CRA. This is
the employer's account number for submitting payroll deductions.
- Enter into a contract of service to hire the individual as an
employee. Specify the work to be done, rate of remuneration, working
hours, conditions of employment, benefits and so on.
- Apply for a social insurance number for any employee who does
not have one.
- Complete a Personal Tax Credit Return for each employee, form
TD1(E). This form outlines the appropriate tax credit for each
employee. Keep this form to ensure the appropriate tax is withheld
from the employee's pay cheque. Income taxes are to be withheld
based on gross income (as per code on TDl(E) form).
- Register with the Workplace Safety and Insurance Board (WSIB).
- Some farm managers have traditionally paid workers as though
they were contract labourers. That is no payroll records are kept
and no deductions are made and submitted to CRA on their behalf.
In many cases these workers are actually employees - not contractors
- by virtue of the employer/employee relationship. Not treating
these individuals as employees is unfair and improper. See Question
7 for more information.
- All farms that, as of June 30, 2006, have paid wages and salaries
to workers come under the Occupational Health and Safety Act for
Agriculture. Some requirements of this Act affect the farm operation.
Contact the Ministry of Labour and the Workplace Safety and Prevention
Service (formerly the Farm Safety Association) for more information.
(See Contact Information).
- Wages paid to employees who are family members are subject to
Workplace Safety and Insurance Board (WSIB) coverage.
Each month:
- 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 the CRA.
- Provide a monthly payroll transaction summary slip to employees
with their pay cheques.
- Submit the monthly remittance on form PD7AR to the CRA. (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 the CRA. This is a summary of all
remuneration paid to all employees.
- Complete and file a year-end summary with the Workplace Safety
and Insurance Board.
- Complete and file payroll summary with Employer Health Tax.
A CRA publication Machine Computation of Income Tax Deductions,
Canada Pension Plan Contributions and Employment Insurance Premiums
(MC tables) is available for those calculating payroll deductions
on a computer.
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 CPP contributions.
Premiums are not required for:
- individuals under the age of 18 or over the age of 70
- agricultural workers who, in a calendar year, earn less than
$250 and work less than 25 working days
- employment where no cash remuneration is paid.
For more info on CPP, go to www.servicecanada.gc.ca
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 exempted.
Spouses and family members are considered insurable if they are
working in a valid employer/employee relationship under a contract
of service. You should obtain a ruling from CRA if there is any
doubt whether or not a valid contract for service has been established.
For additional information, see Question 7.
There is no minimum or maximum age limit for EI premiums; those
over age 65 who are working will continue to pay premiums.
Employee and employer premiums are not required:
- for employment in agricultural enterprises of less than seven
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 per cent 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
Workplace Safety Insurance Board (WSIB) Premiums
The WSIB provides:
- benefits to owner/operators and workers should they became
injured or sick on the job
- safety information and training through Workplace Safety and
Prevention Services (formerly the Farm Safety Association).
Assessment fees
Farm operations are classified into rate groups depending on the
type of farming. Each rate group has a dollar amount assigned to
it annually by the Board that reflects the past and expected future
costs of injuries and occupational illnesses within that rate group.
Employers pay an annual assessment based on the rate into which
they fall and their assessable annual payroll.
This annual assessment is calculated by multiplying each $100 of
assessable payroll (to the maximum earnings ceiling established
in the Workplace Safety and Insurance Act) by the dollar amount
assigned to the employer's rate group. It is illegal to deduct the
cost of WSIB premiums from a worker's wages.
A farmer must report and register its business with the WSIB within
one month of first hiring employees. Registration information, plus
other online services, can be found on their website. (See Contact
Information.)
Annual payroll information for assessment purposes must be filed
by April 30 each year. Failure to comply with the WSIA is a quasi-criminal
offence and farmers could be prosecuted under the Provincial Offences
Act.
The Office of the Employer Advisor is an arms-length organization
that offers employers free advice on WSIB matters. (See Contact
Information.)
Employer Health Tax
Employers in Ontario with a payroll in excess of $400,000 annually
must pay Employer Health Tax (EHT). Those who do not meet this threshold
do not pay EHT.
EHT remittances are submitted annually using the Employer Health
Tax return, which is due March 15 of the following calendar year.
Information is available from the Ontario Ministry of Finance.
Answers To Common Questions
- 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 are not required for employees hired for less
than 25 working days in a calendar year and employees who work
less than seven days in a calendar year are not required to pay
EI premiums.
However Workplace Safety and Insurance Board coverage and Employer
Health Tax contributions are required.
- Can I pay my spouse or child's salary once at the
end of the year?
Yes, provided payment is actually made and deductions are remitted
as required. Do not expect to be able to decide how much to pay
after the 12-month business year has expired. It is important
to have a written agreement on file detailing the job specifications,
including salary levels.
- 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. Employees should
deposit the cheque in their bank account to indicate control over
the funds.
- 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.
- What if I don't like to or don't have time to keep
payroll records?
An employer must keep payroll records as required by the Employment
Standards Act, as well as for tax purposes. Accountants or tax
filers can help with the initial setup of payroll deductions and
monthly procedures if necessary. Talk to the Record of Employment
specialist at Service Canada for more information.
- 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.
- What if I hire someone on contract, do I need to
make payroll deductions?
No. If the contract labourer is a self-employed worker contracted
to do a certain job, only the contracted job cost must be paid.
Custom operators must provide a Clearance Certificate issued by
the WSIB or the employer is responsible for the WSIB premiums.
Ask for the CRA publication RC4110 (E) Rev 06 for help with this
critical determination, since the result will affect EI and CPP
contributions.
- 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 a non-family member would be paid to do the same work. Minimum
wage guidelines apply.
- 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 it is possible document to CRA how the former
employee's shares or partnership interest in the business have
been acquired or accumulated.
- 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 a farm operation has paid workers (money
is exchanged for work) then the operation falls under OHSA.
- Can my spouse, as a farm employee, in turn hire
her mother to look after our young children and deduct the personal
child-care expenses while working for me in the farm business?
The spouse with the lowest income may claim childcare expenses.
When the caregiver 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 a spouse hiring a mother-in-law,
childcare expenses would be deductible in most situations.
Additional Resources
Farm Management Canada publishes Managing People on Your Farm.
This excellent publication uses case histories to illustrate various
management and employment techniques designed to improve managerial
skills.
Conclusion
Paying wages to family members does not have to be an onerous task.
When setting up the business or changing an already established
one, make sure to follow all regulations that apply. Check with
the appropriate government agencies and do not be afraid to ask
for help from an accounting firm or lawyer. Preparation is the key
when setting up wage payment plans not just to family members but
regular employees as well.
Contact Information
Canada-Ontario Business Service Centre
Telephone: 416 775-3456
Toll Free: 1 800 567-2345
Fax No.: 416 954-8597
Email: ontario@cbsc.ic.gc.ca
Website: www.entreprisescanada.ca
Canada Pension Plan
Telephone: 1 800 277-9914
Website: www.servicecanada.gc.ca
Address:
Service Canada
Canada Enquiry Centre
Ottawa ON K1A 0J9
Workplace Safety and Prevention Services
(formerly the Farm Safety Association)
Guelph Regional Office
Ontario AgriCentre
100 Stone Rd, Suite 101
Guelph, Ontario N1G 5L3
Telephone: 519-823-2828 OR 1-888-494-9777
Email: info@farmsafety.ca
Website: www.farmsafety.ca
Office of the Employer Advisor
Ministry of Labour
151 Bloor Street West, Suite 704
Toronto, Ontario M5S 1S4
Telephone: 416 327-0020
Toll free: 1 800 387-0774
Fax: 416 327-0726
Email: askoea@ontario.ca
Website: www.employeradviser.ca
Ontario Ministry of Finance/
Employer Health Tax
Tax Revenue Division
33 King Street West
Oshawa, Ontario L1H 8H5
Telephone: 1 800 263-7965 or 1 800 263-7776
Fax No.: 1 877 4-TAX-FAX or 1 877 482-9329
Website: www.ontario.ca/finance
Ontario Ministry of Labour
400 University Avenue
Toronto, Ontario M7A 1T7
Phone No: 416 326-7160
Toll-free: 1 800 531-5551
Website: www.ontario.ca/labour
