Personal Finance

Paying a Salary to a Shareholder/Director that does nothing?

  • Last Updated:
  • Feb 20th, 2021 12:03 am
[OP]
Newbie
Nov 22, 2016
50 posts
7 upvotes

Paying a Salary to a Shareholder/Director that does nothing?

Hey there,

So my wife, my best friend and his wife started a business. My best friend and I will be active in the business and our wives are just equal Shareholders/Directors. They both have low salaries, are we able to just pay them whatever salary we want and not take salaries ourselves. Even though we are involved in the day to day and they are just passive investors? We are selling 100% products and have no retained earnings so we want to just pay a salary. I would think this is fine because considering they own half the company, they can pay themselves a salary for twiddling their thumbs if they want.

Is that correct?
7 replies
Sr. Member
Jun 26, 2019
818 posts
613 upvotes
Generally speaking, especially for family, you have to pay someone a fair and reasonable price for the work they do.

IE, you can't just pay your wife and kids a salary for the purpose of tax optimization if they aren't doing anything. Lots of info online about this.

This said, if you are all equal shareholders, or depending on how it is set up, you can pay them dividends.
Sr. Member
Dec 12, 2010
772 posts
457 upvotes
I knew someone who paid her 1 year old daughter 80k a year because her face is the company logo.

Should be fine, doubt there will be a CRA audit for getting a salary from the company as long as the company pays some taxes
Jr. Member
Jan 19, 2009
180 posts
50 upvotes
chaugh wrote: I knew someone who paid her 1 year old daughter 80k a year because her face is the company logo.

Should be fine, doubt there will be a CRA audit for getting a salary from the company as long as the company pays some taxes
Wow lol, is the CRA not strict on that rule? Anyone else with experience?
Member
Mar 26, 2012
368 posts
226 upvotes
chaugh wrote: I knew someone who paid her 1 year old daughter 80k a year because her face is the company logo.

Should be fine, doubt there will be a CRA audit for getting a salary from the company as long as the company pays some taxes
The 80k payable to the 1 yr old daughter may be considered as royalty, not salary that implies an employer-employee relationship. Your statement that as long as the company pays some taxes would make the payment deductible is incorrect. Before an expense can be deductible, it has to be laid out to business income, not captal, reasonable, etc. Whether the 80k payment is reasonable depends on factors like name recognition, fame and business of the daughter, annual revenue of the payee, etc.

Back to OP's question, a company cannot pay and deduct an expense (salary or otherwise) to anyone that does nothing for the company. However, a sharesholder is entitled to company dividends, and a director is entitled to director fees if s/he attends directors' meetings.
Deal Guru
User avatar
Mar 23, 2008
11905 posts
8159 upvotes
Edmonton
hybridfx2 wrote: Wow lol, is the CRA not strict on that rule? Anyone else with experience?
You can do whatever you want, until you get audited...

C
Deal Addict
Oct 26, 2003
1258 posts
228 upvotes
Ottawa
Michael4357 wrote: Hey there,

So my wife, my best friend and his wife started a business. My best friend and I will be active in the business and our wives are just equal Shareholders/Directors. They both have low salaries, are we able to just pay them whatever salary we want and not take salaries ourselves. Even though we are involved in the day to day and they are just passive investors? We are selling 100% products and have no retained earnings so we want to just pay a salary. I would think this is fine because considering they own half the company, they can pay themselves a salary for twiddling their thumbs if they want.

Is that correct?
Get an accountant... or start googling.

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