• Last Updated:
  • Jan 2nd, 2015 12:16 am
Tags:
None
[OP]
Member
Apr 18, 2010
219 posts
238 upvotes
Beaverland

Paying my partner (expense?)

Hello.

I'm a self-employed and I often give to my partner some money since I made more. Since sharing is caring :)

I wonder if I can get any tax-deductions out of it?

Thanks.
12 replies
Deal Addict
Feb 25, 2007
1190 posts
626 upvotes
Ottawa
Since you don't mention anything about being incorporated, I assume you are not. Someone else will chime in I hope with what you can do if not incorporated.

However, if this is a structural thing not a one-off, it sounds like you should think about incorporating. This sounds like exactly one of the situations it is most useful for in the case of a small business/entrepreneur.

If you incorporated, with you and your partner as co-owners, the company could:
- Pay a low tax rate on net income within the company, and then distribute the income via dividends to the two of you however you decide is appropriate. Each partner would pay tax on their received dividends
- Pay each of you a salary from the business. This comes out of pre-tax profits of the business, and is taxed as income in each of your hands.

All of this won't be worth the hassle if you're just starting out, not making much money yet, sharing about equally, and in a similar income tax bracket (including whatever income from other sources each of you made). It is worth it if the amounts in question are larger, or if your partner's income, and therefore marginal income tax rate, are lower than yours.
[OP]
Member
Apr 18, 2010
219 posts
238 upvotes
Beaverland
What's the minimum income to get incorporated?
Member
Jan 30, 2008
312 posts
71 upvotes
Toronto
There is no minimum income required to be incorporated. However if you do, you have to pay incorporation fees and file annual corporate tax returns but there are benefits as mentioned above by houska.
Deal Fanatic
User avatar
Nov 18, 2002
7006 posts
608 upvotes
Toronto
Secret wrote:
Dec 30th, 2014 12:30 pm
There is no minimum income required to be incorporated. However if you do, you have to pay incorporation fees and file annual corporate tax returns but there are benefits as mentioned above by houska.
Ditto. Although there's no minimum, there's typically a practical amount you need to hit to justify the added expenses and enjoy the benefits unless you're doing something funky.

Also important to note that ideally you should not be taking all the
Revenue out of a corp as pay/dividend or you will eventually lose the benefits of lower taxation.
[OP]
Member
Apr 18, 2010
219 posts
238 upvotes
Beaverland
ichpen wrote:
Dec 30th, 2014 12:51 pm
Ditto. Although there's no minimum, there's typically a practical amount you need to hit to justify the added expenses and enjoy the benefits unless you're doing something funky.

Also important to note that ideally you should not be taking all the
Revenue out of a corp as pay/dividend or you will eventually lose the benefits of lower taxation.
How much do you suggest?
Member
User avatar
Jan 24, 2014
404 posts
86 upvotes
Toronto
not enough info from op to make any suggestions

I recommend EVERY new business get incorporated from day one.... its mostly a mindset thing, but if you believe and act accordingly from day one, your business will grow and the benefits of incorporation will be in place from the get go.

If however you know your business plan isn't good and the business is really just a job for yourself, then don't bother to incorporate.



Paul
Deal Addict
Feb 25, 2007
1190 posts
626 upvotes
Ottawa
Agree hard to give precise guideline, but OP here's an attempt to help you figure it out.

If you're good with paperwork and have the time, provincial incorporation will cost you a few hundred $. If you get someone to help you (accountant, lawyer...) and/or need to incorporate federally, it will cost you say $1000-2000. Think also at least a few hundred a year to have someone do the necessary filing for you.

This past year, I did something more complicated (federal operating company and holding company) with professional advice for $3000. I expect to spend at least $1000/yr in accounting fees including necessary filings. In my case definitely worth it.

Here's an introductory article. http://www.theglobeandmail.com/report-o ... le4242051/
[OP]
Member
Apr 18, 2010
219 posts
238 upvotes
Beaverland
I make around 60-70k a year, but I have some charges that I'm trying to reduce.
Deal Fanatic
User avatar
Nov 18, 2002
7006 posts
608 upvotes
Toronto
s7evin wrote:
Dec 30th, 2014 5:51 pm
How much do you suggest?
Depends on your circumstances. Depends if it's your main income or supplemental income that you do not necessarily need to live off. If it's income you don't necessarily need incorporating makes a lot of sense, you leave the money in the corp or invest/loan it, lower taxation and you can offset business expenses. You can also pay out small dividends as needed without incurring too much personal tax liability. If that revenue is less than say 10k, probably too little to justify the expense. But I'm no accountant, just my observations. The downside are expenses associated with it as well as proper book keeping that you or your accountant needs to keep.

Consult with an accountant for a better opinion.
Sr. Member
User avatar
Dec 9, 2007
986 posts
395 upvotes
I am confused on what you are trying to do?

Are you trying to reduce your taxable income?

If you want to pay her via salary she must work for the business and be reasonable (being an amount you would pay an otherwise arms length individual).

Just as a word of caution, if the CRA does find that the salary is not reasonable (she actually does not work there), not only will the deduction be denied for your company, but your partner would still pay the tax - in effect double taxation.

If you aren't incorporated, thats fantastic, you can incorporate a name and do a 85 rollover (see accountant for details). This way you can pay dividend out to shareholders (you and your partner) without worrying about the double taxation or requirement to work for the business.
Newbie
Dec 30, 2014
2 posts
4 upvotes
Sudbury
As others have mentioned, the only way for you to be able to deduct those payments as a business expense is if your spouse is doing work for the business. The payments to your spouse would need to be reasonable. Generally speaking, to assess reasonability, you would need to determine the nature of work your spouse is doing and how much you would pay someone for that same work who wasn't related to you. Of course, if you determine that the payments are reasonable and deduct them from your business income, your spouse will need to claim these payments as income.

If your spouse is an independent contractor and not an employee, your spouse would claim the income on form T2125, "Statement of Business Activities". You should have a contract drawn up to support this in addition to ensuring your spouse meets other "contractor" tests that CRA considers such as ownership of tools, control, etc. Otherwise you are entering into an employee relationship which will bring added costs to your own business (e.g., T4 reporting, source deductions).

From your spouse's perspective, keep in mind that there is self-reported CPP for self-employed individuals. When she claims the income, she will have to bear the cost of 9.9% (CPP for herself - the employee share, as well as CPP for her self-employed business - the employer share) which will be reflected on her personal income tax return.

Income splitting generally only works well if your spouse is in a lower tax bracket than you.

With respect to incorporation, at $60,000 to $70,000 I generally would not recommend incorporating although you can consult an accountant who could run specific scenarios for you. Corporations really show their power if you are earning significant income beyond your needs (i.e., you are leaving a significant portion of the income in the corporation which will only be subject to personal tax when you withdraw those funds at a later date). If you are earning the income in the corporation but withdrawing all of it in the same year, then you are essentially no better off due to the integration mechanisms built in to the dividend tax system.

Incorporation also brings added costs associated with compliance. Some are one-time costs (incorporation fees, minute books and resolutions, rollover of assets and goodwill from proprietorship into the corporation) and some are annual (preparing Notice to Reader financial statements, filing corporate income tax returns, preparing annual minutes and director resolutions, dividend (T5) reporting).

If you do decide to incorporate though, be careful in how you structure it. Generally speaking you will want to ensure you structure your share capital such the you retain control and your structure provides you with options in the event of a marital/relationship breakdown (because your spouse will effectively own a portion of your company). You will also want to ensure several classes of shares are setup so you can choose which shareholders you pay dividends to. For example, if you and your spouse subscribe to 100 common shares each, then whenever you declare a dividend it would have to paid equally to each of you. This defeats the income splitting opportunity. Instead, if you own Class A commons and she owns Class B commons, you can choose to pay her a different dividend than you to take advantage of planning around tax brackets. Dividends are great because they are not subject to the "reasonability" test previously outlined.
Member
Feb 15, 2010
461 posts
285 upvotes
Surrey
I had similar questions to eugeneo. Is your partner doing work for you or are you just trying to give them money and claim this as an expense? Because the latter is certainly not allowed.

Top