Income splitting through salaries paid to family members of Canadian healthcare professionals is a common and permissible strategy, allowing higher-income practitioners to reduce their overall tax burden. However, this must be done in a commercial-like manner, with strict adherence to CRA guidelines. A recent Tax Court of Canada case, Balla v. The Queen, 2023 TCC 104, underscores the importance of following proper procedures. The message from this case is clear: “Make sure this doesn’t happen to you.”
- Importance of Documentation: Formal contracts, proof of payments, and timesheets are crucial to validate income-splitting arrangements.
- CRA Scrutiny: Anticipate increased audit activity targeting income splitting and prepare accordingly.
- Professional Guidance: Seek advice from experts like Jonathan Tucker to ensure compliance and avoid costly penalties.
What Happened in Balla v. The Queen?
In Balla v. The Queen, Mr. Balla, a commissioned employee selling air conditioners and similar appliances, claimed substantial amounts as employment expenses for payments to his spouse for administrative work. The CRA disallowed these expenses due to a lack of formal contract, insufficient documentation, and no concrete evidence of actual payments or services performed by his spouse. The Tax Court upheld the CRA’s decision, highlighting several key shortcomings in Mr. Balla’s defense.
Differentiating Between “Absolutely Required” and “Nice to Have” Documentation
To ensure compliance and make your practice bulletproof, it is crucial to distinguish between what is absolutely required and what is nice to have when employing a family member.
Absolutely Required Documentation:
- Formal Employment Contract: This document must outline the duties, responsibilities, and compensation structure for the family member. It should be signed by both parties.
- Proof of Payments: Payments should be made directly to the family member’s personal bank account, with clear and traceable records. Avoid using joint accounts.
- Timesheets: Detailed records of hours worked by the family member, including dates and specific tasks performed.
- Task Descriptions: Clearly defined job descriptions outlining the specific duties and responsibilities of the family member.
- Invoices/Receipts: If the family member is working as a contractor, ensure there are detailed invoices for the work performed.
Nice to Have Documentation:
- Performance Reviews: Regular performance evaluations can help substantiate the legitimacy of the employment relationship.
- Job Application/Resume: Having a formal job application and resume on file can further legitimize the hiring process.
- Training Records: Documentation of any training provided to the family member can demonstrate the necessity of their role.
- Meeting Minutes: Records of meetings where the family member’s work is discussed or planned can support the claim that their role is integral to the business.
Preparing for Increased CRA Scrutiny
Healthcare professionals should anticipate increased CRA audit activity targeting income-splitting practices. To mitigate risk:
- Maintain Detailed Records: Keep meticulous records of all employment relationships and work performed by family members.
- Ensure Fair Compensation: Pay reasonable salaries that reflect the market rate for the services provided.
- Use Separate Bank Accounts: Avoid using joint accounts for compensating family members to ensure clear and traceable payments.
- Regular Reviews: Periodically review and update employment contracts and ensure compliance with all CRA requirements.
By learning from the Balla case, healthcare professionals can better navigate the complexities of income splitting, ensuring compliance with CRA regulations and avoiding costly penalties.
Make sure this doesn’t happen to you. It’s crucial to understand the risks and ensure proper planning and documentation. For personalized advice and to avoid these pitfalls, contact Jonathan Tucker, CPA, CA, LPA, at [email protected] or by phone at (905) 601-5659, x101.
