If your family members, such as spouse or children, help you out in your business, paying them salaries may be an effective strategy of income splitting and reduction of the family's overall tax burden.
Certain criteria should be met in order for the salaries to be deductible for the business:
- an employer-employee relationship must exist.
- salaries paid to family members must be reasonable for the work performed.
You should maintain sufficient documentation to prove that criteria are met in case the tax-man questions you. For example, you should document the work carried out by your family members to prove that the pay is reasonable. Paying by business cheques periodically is also a strong evidence of employer-employee relationship.
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