While hiring family members can be seen as nepotism in certain business circles, for the self-employed it can make good business sense. Whether you’re hiring your child for the summer or recruiting your spouse to take some work off your plate, keeping it “all in the family” can have its advantages.
Here are a few potential perks to hiring employees from within your family tree:
Seize your opportunity to income split
There are few opportunities for income splitting in Canada. That being said, if your spouse or another family member becomes an employee of your business and falls into a lower income bracket, you may be able to benefit by paying less taxes (provided you follow the arm’s length rules).
Increase RRSP contributions
While your child may not be making enough extra money in their summer job to significantly contribute to their RRSPs, they’re still earning RRSP contribution room that can be carried forward and used later in life. Similarly, if your spouse is working part-time for your business while they stay home to raise young children or further their education, they can carry forward their RRSP contribution room to a time when they’ve re-entered the workforce—and potentially contribute a larger amount to their RRSP than they otherwise would have been able to.
Become CPP eligible (eventually)
Part of your CPP retirement pension is based on how long you’ve been making CPP contributions and how much you’ve paid into the plan. By formally employing family members, you’re helping them make CPP contributions earlier and/or allowing them to continue making contributions during a time when they would have otherwise been unemployed.
Take advantage of tax benefits
There are plenty of potential tax benefits to hiring family members. For one thing, if you’re paying your family members a salary, those salaries are eligible tax deductions for your business. From the family members’ perspective, depending on the amount of income earned, they may also be able to claim non-refundable tax credits, such as tuition and donation credits. While this might not be an option for a summer student who is likely earning less than the 2019 basic tax credit amount of $12,069 per year, it is something to consider for family members who will be working in the business year-round.
For your employment relationship to qualify for these perks, treat your family members as if they were arm’s length employees. If they’re independent contractors, make sure they send you an invoice each pay period. If they’re employees, put them on your company’s payroll and issue them a pay cheque on a regular basis. Above all, make sure they’re paid a reasonable salary—one you would pay a non-family member to do the same job.