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Your son, Freddie, needs a job. You have a business. Do you hire him? Now, that’s a loaded question! The answer is not as cut and dry as you would think. In this article, we will explore some of the pros and cons and any payroll tax implications you may need to consider when hiring family members in the workplace.
First, let’s be clear on what family members are included in this discussion. According to the Canada Revenue Agency there are several ways you can be related to your employer.
You can be related by:
· marriage (including common-law partnership);
· adoption; or
· blood (for example, parents, brothers, sisters, or children)
Now, for the debate!
The Pros of Hiring Family Members
I’m an optimist, so let’s start with the PROS.
· You may have some idea about their work ethic and reliability
· You should know whether or not you will be able to work with them successfully on a daily basis
· Less possibility of lying on their resume (If they’re smart they won’t. And if they do, you probably shouldn’t hire them.)
· Increased loyalty and commitment
· Increased Trust
· Income paid to a spouse or child may qualify as a business tax deduction if you meet the CRA conditions
The Cons of Hiring Family Members
But, the realist in me knows it would be irresponsible not to examine the CONS as well.
· Inability to separate family and work
· Family may assume they should be given special privileges – calling in sick too often with no repercussions, work less than other employees, entitlement to raises, etc.
· Talks about money will almost always be awkward
· Disciplining or terminating a family member often seems impossible
· Lack of respect from the employee
· Perceived nepotism
Hiring Family Members and Payroll
So, “how does all of this fit in to running payroll for my small business” you ask. Well, let’s take a look at the different taxes you will need to apply to your new ‘employee’.
What some business owners don’t realize is family members are usually not eligible to claim Employment Insurance benefits (EI) if they are laid off – even if the reason is ‘shortage of work’. That means neither the Company nor the employee should be contributing to EI.
And, how do you know if the employee is eligible for EI? Employment will be insurable only if it is reasonable to conclude that your employer would have hired a non-related person under a similar contract of employment. This is determined by looking at several factors: remuneration paid, terms and conditions of employment, duration and necessity of services performed.
If you are still unsure about the relationship, you can always call Canada Revenue Agency at 1-800-959-5525 as they are responsible for determining eligibility.
Next, let’s talk pension contributions.
You must deduct CPP and/or QPP contributions from an employee if:
- The employee is engaged in pensionable employment during the year; and
- Is not considered to be disabled under the CPP or the Quebec Pension Plan (QPP); and
- Is 18 to 70 years old – even if the employee is receiving a CPP or QPP retirement pension.
There is one exception to the rules above. You will not deduct CPP if the employee is 65 to 70 years old, and gives you Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election with parts A, B and C completed.
While contribution rates may vary between CPP and QPP, one thing remains steadfast. These contributions must be withheld from all your employees – family members included.
For Quebec employees, QPIP (Quebec Parental Insurance Plan) is also a required tax. The monies contributed to this plan are to allow for the repayment of benefits to an employee who takes maternity, paternity, adoption or parental leave where there is an interruption of earnings.
And finally, as the old saying goes, “the only sure things in life are death and taxes”. Income tax is another non-negotiable when it comes to family members. Income tax will be calculated and withheld without end – no reduction for family members and no age limit. If you earn it, you are taxed on it.
Aside from taxes, there is another unique situation that sometimes occurs between employers and a spouse that is an employee – changing the spouse to business partner. This is allowed as long as it is possible document to CRA how the former employee’s shares or partnership interest in the business have been acquired or accumulated.
To be considered an actual partner, the spouse must either devote a significant amount of his/her time, specific skills, or training to the business or must have invested his/her own property into the business. It is always a good idea to have a partnership agreement drawn up when the relationship changes.
Ultimately, it is up to you (the employer) whether you want to hire Freddie and/or other family members or not. And, while most agree it is usually not a good idea to hire family members, you may feel differently.
If this is the case, you will need to follow a few rules to avoid unnecessary conflict: ensure the family member does the work they are hired to do, know the person has the skills required to do the job, keep pay comparative to others in similar roles and don’t be afraid to have those ‘difficult’ conversations.
Please let us know what your thoughts are on this topic. We’d love to hear from you!