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Wife gives administrative support to consulting business

By Michael Fromstein |

David asked:

I currently run a side business where I do some consulting and my wife provides administrative support. She is in a lower tax bracket than me. Is there any advantage to starting the business as a partnership vs. having it as my sole proprietorship and paying her a salary?

Michael Fromstein answered:

Theoretically, there may not be much of a difference if you are audited by CRA. If you have a partnership and you allocate more of the income to your wife than her administrative support justifies, the Income Tax Act gives CRA the right to reallocate the income to you because you allocated more to your wife to get tax advantages and they can reverse it.

If you operate as a proprietorship, you can only pay her a reasonable salary for the services she provides. The courts have held that you can pay her a higher rate than a stranger because you do not fear her quitting without notice or stealing from you. However, the point of reference is still a reasonable salary. If you pay her more than that, the Income Tax Act gives CRA the right to deny the above market portion of the salary.

Whether you are not audited or not, I think a proprietorship is easier to operate and the reporting is simpler, although you will need to prepare a T4 for the salary paid to your wife.

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