Does the same rule apply to my spouse?

Yes. A salary paid to your spouse or common-law partner follows the same rules as one paid to your child: it must actually be paid, for necessary work, at a reasonable amount.

Can I deduct the food and housing I give my child?

No. The value of board and lodging you provide to your dependent children or your spouse is not a business expense, even if they work for you.

Paying your kid from the business: is the wage deductible?

A real expense, with conditions

Plenty of self-employed people and small business owners put a child to work: filing invoices, answering the phone, helping in the shop or on a job site over the summer. The question comes up every year: is that wage a deductible expense?

As a rule, yes, if three conditions are met. The Canada Revenue Agency sets them out in Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.

The three conditions

1. The wage is actually paid. An amount promised, or written in the books but never handed over, does not count. The money has to really move from the business to your child.

2. The work is needed. The work has to be necessary for earning the business income. A good test: if your child had not done it, you would have had to hire someone else. Household or family chores do not qualify.

3. The pay is fair. The wage has to make sense for your child's age and match what you would pay someone else for the same work. A wage inflated to shift income to your child fails this test.

Miss any one of the three and the deduction falls away.

Keep proof of every payment

Keep the documents that support the wage. If you pay by cheque, keep the cancelled cheque. If you pay cash, have your child sign a receipt. In practice, a transfer to your child's own bank account, with a timesheet and a short description of the tasks, leaves the clearest trail.

An employee like any other

Your child is an employee. You report the wage on a T4 slip, the same as for any other employee.

Two useful details:

You can pay your child with a product from the business instead of cash. You then claim the value of the product as an expense, add the same amount to your gross sales, and your child includes that value in their income.
The value of board and lodging you provide to your dependent children is not deductible.

The same rules apply to a salary paid to your spouse or common-law partner.

What we do

We check all three conditions with you before the first payment: the tasks, the hourly rate against the market, and how you will pay. Then we record every pay in your books, prepare the slips, and keep the proof file ready in case of a review.