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How to Hire Your Children and Split Income Legitimately

It has been an exciting week here at my household.

Both kids are off to school. Yep, both Robin and Bruce are officially in full-day Kindergarten.

We got a letter from his school about Bruce’s class placement. He didn’t get into the class we requested.

You’re probably thinking now… Cherry must be one of those helicopter moms.  😉

I swear, I’m not.

We just wanted him to get into a class with our neighbour’s son, whom he plays with regularly, so it would make his first year of Junior Kindergarten a lot smoother.

This little guy was so overwhelmed first day of school that he could barely smile for the pix  

But he didn’t get in…

It never felt good to be rejected, but I was totally prepared to let this one go. 

After all, how bad could it be since it’s just JK?

We ran into another mom whose son is already one year with Bruce’s assigned teacher.   I asked her how her experience has been. 

Negative. 

Oops… what would you do if you were us?

We called the school but no one answered…and we never called back.  

Labour day came, our kids were out playing with our neighbours’ kids as usual.   Our neighbours are teachers at the school board. 

Their older daughter also had previous experience with Bruce’s assigned teacher. 

Their experience… negative again ☹☹ Two strikes! 

No parents want to fail their kids, especially when they’re so young. 

Armed with the guilt from not requesting earlier, I immediately fired off an email to the Vice Principal, not really expecting him to respond on the Labour Day Monday.

To my surprise, he responded a couple of hours later.  Bruce’s switched to our original requested class!  Yay!  Success!

Two life lessons learned:

  1. You fail 100% at the shot you don’t take – you don’t ask, you don’t get it (it was uncomfortable for me to persist, especially after our first request was turned down, but the guilt of failing as a parent eventually won…). Same in real estate investing. You don’t try, you won’t get what you want. Always have your end goal in mind.
  2. School, class placement, real estate investment, long-term wealth building and whatever you set your mind doing, is best if you have someone who has been there, done that, to guide you through the process. Always learn from those who are ahead of you, get the experience, so you could avoid the mistakes that they made.

Now life lessons are over…let’s discuss the possibility of splitting income with your kids, by means of paying them to do some work for you.

Can you pay your children salary/fees?

Some of you might have kids who’re old enough to handle some of the business and investment property chores for you (that’s how I call those tasks that you must do but don’t necessarily want to do with respect to your investment properties and business). 

They can definitely help you with the work that you don’t want to handle.

In return, they can receive a reasonable amount of compensation.

Let’s say, you hire your daughter to do some bookkeeping work for you.

You can only pay her the same amount you would otherwise pay an independent bookkeeper to do the same thing for you.

If you would normally pay $300 a month to perform the bookkeeping duty for you, you cannot pay your daughter $800 just to split income with her. 

Because your children are related to you, the risk from CRA’s point of view is that these children may not really perform the duties as described.

On top of reasonable compensation, you also have documented the type of work that’s being done.

This may include but not limited to:

  • Proper employee file, such as employment contract
  • Timesheet
  • Description of work done
  • Invoices, if hired as subcontractors
  • Proof of payments
  • Payments made on a regular basis

Filing obligation from the kids’ point of view

If your kids are over the age of 18, it is always wise to file an income tax return.  You get GST tax credit, sometimes Ontario Trillium Tax Benefit. 

If your kids are under the age of 18 and you don’t know if the income is enough to trigger the tax, it’s also wise to file a tax return. 

But if you are certain that your kid has no tax liability, you can choose not to file a tax return.

For a more in-depth answer, you can always refer to this CRA link.

I hope that one day, I would be able to pay my kids to do some work in my business for me too!

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

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