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    4 Replies Latest reply on Jan 11, 2010 12:19 PM by rgilles

    LLC sole owner or partner with my wife?

    artnut Newbie
      I'm not sure what to do about this in regards to taxation would it be better for me to classify her as an employee and write her a check each week or call her a partner and see how it pans out at the end of the year? We are very new at this and want things legal and whats best for the bottom line.
        • Re: LLC sole owner or partner with my wife?
          rgilles Wayfarer
          Under the legal test for whether your wife was an employee or
          independent contractor, there are three main tests: control, ownership
          of tools and equipment, and opportunity for loss or profit. What the
          parties have termed the arrangement, i.e. contract for service, is
          important but does not overrule the outcome from the three main tests.

          Based on what you have described there might be two other problems.
          Simply because A paid your wife money and called it for contracting
          services does not make it deductible to it for income tax purposes. In
          order for it to be deductible the payment has to have been incurred for
          the purpose of gaining or producing income [paragraph 18(1)(a) of the
          ITA]. If your wife performed no services to A, there is a good
          possibility that if the CRA determines this, they will disallow the
          deduction entirely. The worse part is that they might not reassess your
          wife to remove the amount from her taxable income. In other words, no
          tax deduction to the corporation, and a tax inclusion to your wife. The
          other problem is that if the CRA believes your wife did some services
          to the corporation, either as an employee or an independent contractor,
          they might believe she was paid too much. If that is the case, they
          might disallow the deduction for the overpayment under section 67 of
          the Act on the basis that the payment was unreasonable in the
          circumstances.

          If your wife is not going to be doing any services to A, you should
          really consider paying her as a shareholder. Shareholders are paid as
          of the right of holding the shares, and not for having to done work for
          the corporation. Payments to your wife for salary or services as an
          independent contractor require her to perform work for A.

          Another problem I commonly see in this circumstances is that if your
          wife was paid as an independent contractor, was she required to charge
          A for GST. If she passed the small supplier threshold, she was required
          to charge and collect GST on the services she bills for. While A might
          get an input tax credit for GST paid, this still means your wife might
          have had to collect and pay GST. And if she didn't there is a huge
          interest and penalty issue.

          I would recommend that you speak to a tax professional about the CRA
          ruling. You will be required to answer questions with regard to the
          main tests. The control test will be the main focus. They will ask
          questions like did she have set work hours, was she able to subcontract
          the job to others to perform, does she have a set workstation, was she
          free to come and go, etc.

          To make some further comments, there is no specific rule that a
          spouse/partner cannot be an independent contractor to a family
          corporation. While the situation will be looked at more closely, as the
          question will come up whether that spouse looks for work from other
          non-related companies or just works for the family corporation. An
          independent contractor by nature works for anyone they can get a job
          from. So in the times the person is not doing work for the family
          corporation, the CRA will ask for evidence of what was done to get work
          from other businesses, i.e. did she have business cards, a company
          telephone number, were ads taken out or flyers distributed, etc.

          If your wife is found to be an employee, the following reassessments
          might occur. She will be reassessed to make the payments as employment
          income. Assuming she had no other source of income the CRA will
          disallow any deductions she has taken from the income unless she
          qualifies for the deductions under the employee rules (see section 6 of
          ITA). The corporation will be reassessed for her CPP contributions (as
          an employee) and possibly EI contributions (she might be exempt
          depending on the exact facts). Further, it might be hit for a penalty
          as it did not make the required source deductions on her pay. And both
          A and your wife might be reassessed for interest owing on extra tax,
          and penalties depending on the specific facts.
          • Re: LLC sole owner or partner with my wife?
            AndrewTax Newbie
            not sure what your full situation is, but just from what you wrote, it doesn't seem like treating your wife as an employee would be beneficial. Yes, you would get a deduction for the expenses, but they would also become income to your wife, and, you would also be responsible for employee payroll taxes.
            1 of 1 people found this helpful
            • Re: LLC sole owner or partner with my wife?
              artnut Newbie
              Wow thank you so much for your time spent on the reply. That was very helpful information. It seems so easy for the water to get muddied when it comes to issues like this and we are grateful for your clear and concise reply. It seems that for our purposes paying her as a shareholder would be the best idea. It seems that although her role at this time isnt perfectly clear she could easily be considered an employee, and not a contractor. Again, thank you for your help.