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Last updated: Jan. 29, 2025
Know the Rules When Paying Family for Farm Work
Farming as a family is a tradition for many, built on shared values and hard work. But when it comes to paying family members, things can get complicated. Should everyone get a paycheck? How do you value the countless hours put in by spouses and children?
Beyond answering these questions, hiring family members also requires following Canada Revenue Agency (CRA) rules. It sounds like an awful lot of work, and to what end? Is it even worth it?
Due diligence can help you capitalize on some tax advantages while helping your family access certain tax benefits. Let’s break down how to navigate the process, from understanding the CRA rules to making fair decisions.
Learning the Basics: Employment Standards vs. Tax Implications
Farming with family involves more than just shared meals and long days in the field. It also brings up legal and financial considerations, especially when it comes to employment standards and taxes. Let’s start by clarifying the difference between the two:
- Employment Standards: These provincial regulations set minimum wage requirements, overtime pay, vacation time, and record-keeping for employees. In some provinces, like Alberta, family members on small farms are exempt from most employment standards.
- Tax Implications: These federal and provincial tax rules apply to how you pay and report income for your family members. Even if your province exempts family members from employment standards, you may need to calculate and deduct provincial and federal income tax and other source deductions (such as CPP).
For this article, we’ll focus strictly on tax implications, starting with why paying your family a wage can help your tax situation and even help with your farm transition plans.
Taxes and Family Ties
There are many potential perks to bringing family members into the fold and paying them for their farm work. However, everyone’s farm situation is different, and what works for one operation may not work for another. Before deciding whether to pay your family for farm work, seek the guidance of a tax advisor.
That said, here are just some consider:
1. Income Splitting and the Tax on Split Income
In the past, income splitting (also called income sprinkling) was used to take advantage of Canada’s marginal tax rates – a progressive tax system in which the higher your income, the higher your tax bill.
Income splitting redistributes income between spouses – usually from a high-income earner to a lower-income earner – to reduce a family’s overall tax bill.
However, the government has repeatedly said it doesn’t like “split income” and expanded the Tax on Split Income (TOSI) to target that very thing. Splitting income is technically no longer acceptable, and payments to family members should be based on work performed (or profit sharing, under an acceptable exemption) versus simply redistributing income from a high-income earner to a low-income earner.
While there are still some acceptable strategies for redistributing income, the attribution rates are complex, and it’s highly recommended that you consult with a tax expert before acting.
RELATED: What Is Income Splitting, and How Does It Benefit Canadian Farmers?
2. Helping the Next Generation Save for the Future
One benefit of providing your children or grandchildren with taxable income early is that they can accumulate contribution room in their Registered Retirement Savings Plans (RRSPs) sooner.
RRSPs are tax deferral mechanisms that allow you to contribute up to 18% of your earned income in the previous year or the annual RRSP limit (for 2023, the annual limit is $30,780) – whatever is less. While your children and grandchildren are unlikely to max out their limits immediately, any unused portion of the RRSP limit carries forward and accumulates. In future years, they can contribute much more than their annual limit by taking advantage of unused room.
When your children and grandchildren make future RRSP contributions, they will receive immediate tax relief through a tax deduction and earn investment income, usually exempt from tax as long as the funds remain in the plan. While an RRSP is taxed when it’s withdrawn, this typically happens when they’re much older, earning less income, and subject to a much lower tax rate.
If used correctly, RRSPs can also be powerful, long-term investment tools, so the earlier you start them, the more these investments will grow.
Example: The Power of Starting Early RRSP Contributions
Imagine you hire and pay your granddaughter, Sarah, for her farm work during busy seasons. When she turns 18, Sarah starts contributing $500 each year to her RRSP. That might not seem like a lot, but the power of compound interest can work wonders over time.
If she keeps up her yearly contribution of $500 and that money grows at an average rate of 5% per year, by the time she’s 65, her RRSP could be worth around $110,000. That’s an impressive nest egg from starting with just $500 a year!
This example shows the incredible impact of investing early in life, even with small amounts. It’s also a great way to illustrate one of the benefits of paying family members for farm work.
RELATED: Should I use an RRSP or TFSA as a business owner?
3. Building for Retirement with CPP Contributions
Paying family members involves deducting taxes and making Canada Pension Plan (CPP) contributions (for individuals over 18 who earn more than $3,500 in a year), which can also be beneficial.
Like RRSPs, starting these contributions early in life will help your children and grandchildren build up their retirement benefits. While you may not see them reap the benefits, there is some peace of mind in knowing they’ll have an additional source of income in the future, whether they eventually take over the farm or not.
4. Tax Breaks for Your Bottom Line
Paying your family for their hard work on the farm can also help your bottom line. When you pay your family a wage as an employee, you can claim that as a legitimate business expense that reduces your farm’s taxable income.
5. Building a Strong Farm Team
Bringing the next generation into the fold can breathe new life into your farm. Whether it’s their tech savvy, fresh ideas, or just extra hands during busy seasons, having family members involved can help your farm thrive.
For example, let’s say your grandkids live, eat and breathe social media. They can help you share your farm story online and maybe even help you connect with new customers. Or, if they’re interested in the business side of things, they could help with financial planning or marketing.
By investing in the next generation through fair wages and opportunities, you’re not just building a stronger farm – you’re building a stronger family legacy.
6. Testing the Waters for Future Transition
It’s natural to hope that the next generation will take over the family farm, but we know that’s not always the case. Paying your family for farm work can be a great trial run to see if they like it and if you can all work together as a business – not just as a family.
Suppose things work out differently than planned. In that case, you will still control the farm while your family members gain valuable experience and earn money to pursue other opportunities if it turns out farm life isn’t for them.
RELATED: An Introduction to Transition Planning for Farmers
Paying Family Members: Keeping Things Fair and Legal When Not Dealing at Arm’s Length
In Canada, when you (or your farm corporation) and your employee are related, it is deemed not to deal with each other at arm’s length and the employment may be considered not insurable. If it’s not insurable, then the person earning the income cannot pay into Employment Insurance (EI) or access any tax benefits like those mentioned above.
How the CRA Evaluates the Circumstances of Employment
When determining the circumstances and legitimacy of employment, the CRA uses four main criteria:
- Remuneration Paid: Is the wage you’re paying your family member similar to what you’d pay someone who isn’t family for the same job?
- Terms and Conditions of Employment: Are the job requirements, hours, and days your family member works like other employees?
- Duration of Work Performed: Does the length of time they spend working make sense for their job? Does it fall in line with the farm’s normal cycle and history?
- Nature and Importance of the Work Performed: Does your family member’s work help the farm? Is it integral to your operation?
Keeping the CRA Satisfied: Fair Pay and Documentation
Now that you know the CRA’s criteria, the next step is legitimizing the job you’ve hired your family member to do.
- Market-Based Wages: You must pay your family members a fair wage, like what you’d pay someone who isn’t family and not more than what is reasonable given the job and their work experience.
- Documentation is Key: You need to document how you arrived at the wage, whether this was looking at job postings or conversations you had with other farmers in your region. The Government of Canada’s Job Bank provides some wage data for farm workers, such as “General Farm Worker – Livestock.”
- Formal Agreements: Even though you’re employing a family member, you need a written employment contract outlining their roles and responsibilities – just like you would for a non-family employee.
- Track Hours and Performance: Supporting documentation, such as timesheets and regular performance reviews, will show that family members work and contribute to the farm.
- Deduct Taxes Correctly: You must pay your family members regularly and deduct the right taxes from your payroll. And don’t forget to issue a T4 at the end of each tax year. You can also outsource your payroll if you don’t love dotting the i’s and crossing the t’s.
- Pay by Cheque or Direct Deposit: Paying in cash or in-kind may be common practice on the farm, but it can make deduction withholding and remitting tricky. Instead, consider paying by cheque or direct deposit to create a paper trail.
How to Avoid CRA Scrutiny When It Comes to Paying Family
Where such claims run afoul of CRA and the courts, there are instances in which family members are never actually paid, or the cheques issued for pay are endorsed back to the business.
Inflated pay, well above market norms for the work performed, or cases in which the employed child is attending and living in another city while “working” are also easy markers for the CRA to reject salary expense deductions.
If you keep everything above board, you won’t run into any issues with the CRA.
Conclusion
Paying family members for their work on the farm can be a smart business move, but you need to follow the rules to avoid potential CRA issues.
When in doubt, treat your family members like regular employees, keep good records, and seek professional advice regarding taxes and payroll deductions. This will ensure that your farm is in good standing with the CRA while accessing tax advantages for you and tax benefits for your family.
Want to dive deeper into farm tax strategies?
Download our free guide, Ultimate Guide to Tax Planning and Preparation for Canadian Farmers, Contractors, and Small Business Owners. It’s packed with tips and information to help you maximize your bottom line and keep more of your hard-earned money.
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Please note: This blog post is adapted from an original article in the Western Producer. We’ve updated the content for accuracy and clarity.
Disclaimer: The material above is intended for educational and informational purposes only. Always consult a qualified tax advisor like FBC regarding your specific tax situation.
