Entrepreneurship & Small Business

Hiring A Family Member (Sole Proprietorship) - Important Things I Need To Know?

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  • Apr 19th, 2017 12:30 pm
[OP]
Member
User avatar
Aug 3, 2010
231 posts
13 upvotes

Hiring A Family Member (Sole Proprietorship) - Important Things I Need To Know?

I plan to hire 1 family member into my small business (sole proprietorship in Ontario). However, i am unable to find that much details on what the proper steps that should be.

Therefore i was thinking:

  1. Keep photocopy records of cheques I make out to this family member every 2 weeks. (Btw, can i make an agreement with this employee to pay him a cheque once a month -- to save on paperwork or does CRA demand cheque records every 2 weeks?)
  2. Keep records of the duties he performed related to the payment for that period

Is that all? Anything i am missing?

I plan to pay this employee at the lowest level salary range that i see on the PayScale site (Canada) - Software Engineer for that specific job so CRA can see that i am not paying this family member an exorbitant salary, but one that is an entry level (its the lowest in the range window the site shows). However, the following year (2018) I may kick up this family member's salary, if he is descent enough, to the median level for that job as reported by that site (it's a $20K bump). With this site link in hand I figure CRA will have documented proof of why i gave this family employee the bump, if i do, because the salary amount is the median for the industry in Canada and his prior year (2017) was an entry level probationary salary (hence why it was at the lowest end, as reported by the site).

More Questions:

  1. Must i inform CRA asap that i am hiring an employee (i have a business and personal CRA account with them but not sure if i must fill out a special form to inform CRA about a hire even though we are 1 quarter into 2017)?
  2. Must i pay this employee some special employee benefits beyond his once a month pay cheque? I understand there is an arms-length rule that CRA has which implies i cannot withhold CPP (or something) since this is a family member but are there things i must withhold or pay on top of his cheque and/or keep records of that i am unaware of?

Thanks a bunch.
3 replies
Deal Addict
User avatar
Dec 27, 2009
3044 posts
1079 upvotes
Ottawa, ON
First - You absolutely MUST withhold CPP - don't screw that up. That has nothing to do with family memeber or not. Your family member MAY be able to opt out of EI, but not necessarily.

"The Employment Insurance Act S. 5(2)(i) states that employment is not insurable if the employer and employee are not dealing with each other at arm's length (determined in accordance with the Income Tax Act). However, the employment will be deemed to be insurable "if the Minister of National Revenue is satisfied that, having regard to all the circumstances of the employment, including the remuneration paid, the terms and conditions, the duration and the nature and importance of the work performed, it is reasonable to conclude that they would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length."

In other words, if you would have hired this person anyways they can be treated like any other employee and would be eligible for EI benefits, etc. Lets say you were an Architect with a small firm, and your wife is also an architect and comes to work for your firm as an architect. Her pay is what she could make at another firm. That would be completely reasonable to be treated as if she were an arms length employee and deduct EI from pay. If on the other hand you "hire" your wife who has no skills/work experience and pay her a huge salary for doing next to nothing - that is a problem and not insurable by EI.

As far as being paid once a month, it isn't common, but it was like that in one firm I worked for in Victoria. I think as long as your employee is okay with it, CRA isn't going to care. If you go on the CRA website there is a payroll deductions calculator and one of the choices for salary deductions is 12 pay periods per year.

You need to treat this employee like any other employee based on what you've described. CPP, EI and tax all need to be withheld from paycheques and submitted to CRA (and you will have to kick in the employer portion of CPP and EI).
[OP]
Member
User avatar
Aug 3, 2010
231 posts
13 upvotes
Very much appreciated @Chickinvic ... i will have to do some extensive reading about the process of handling CPP, EI, etc.
Newbie
Jan 18, 2017
34 posts
15 upvotes
It's pretty simple:

- Hire the family member;
- Decide on a pay period (26 periods/yr, 24 periods, 12 periods, whatever);
- Use CRA's payroll calculator to figure out what to pay employee for the pay period http://www.cra-arc.gc.ca/esrvc-srvce/tx ... c-eng.html ;
- You'll withhold CPP and tax, not EI (Because the person is non-arms length, CRA will get grumpy and most likely deny the claim until you go to tax court and argue otherwise. It's generally not worth it, so you'll record your family member as being EI-exempt.);
- Give a cheque to family member for the balance;
- Cut a cheque to the Govt for the balance (You'll need to open an RP account with CRA if you haven't already done so);
- Repeat;

Make sure that whatever you're paying the family member is market-rate (ish). In other words, not too high. CRA gets pissed when you claim an $80k deduction for Grandma doing 2 weeks of work for you over the summer.

brand404 wrote:
Apr 18th, 2017 10:12 am
I plan to hire 1 family member ... Thanks a bunch.
______
Canadian & US tax guy

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