Two fairly recent cases dealt with the deductibility of amounts paid to family members (George Aprile and Ambulances B.G.R. Inc.). In Aprile, the taxpayer paid $7,000 to each of his 11- and 13-year old children. He testified that they were paid $7,000 for photocopying, stuffing and stamping envelopes for five different mailings to more than 2,500 people. Including some other activities, each child worked for over 700 hours in the year, and Mr. Aprile used a compensation rate of $10 per hour.
Mr. Aprile did not pay his children by cheque. Instead, he bought them snowmobiles, motorcycles and gasoline for the machines and gave them cash to a total value of at least $7,000.
The CRA auditor told Mr. Aprile that the CRA was not interested in the nature of the compensation because there were no cheques or receipts to back up the amounts paid. Counsel for the CRA disagreed with the proposition that deductible services could be paid in kind.
The Court stated that "it is clear that an amount can be paid in kind as well as in currency" and that the Court did not doubt the appellant's credibility. Since the Department of Justice lawyer never discussed or challenged the value of the work the children did, the Judge determined that the amounts paid to the children were deductible.
In the Ambulances case, the taxpayer had two adult children and paid them significant bonuses that were determined at the end of each year. The children were not shareholders of the corporation, but they were employees. The CRA claimed that the bonuses were paid in order to reduce corporate income to $200,000. The CRA also claimed that the amount of the bonuses was unreasonable when compared with the work performed by the children.
The Court did not accept the CRA's argument. The children provided significant services to the company. They were key managers of the business, like their father, and so bonuses were deductible.
The conclusion in both these cases is that. if family members perform services, they can receive appropriate deductible payments, which may be in kind. Nevertheless, we suggest that it is better to make payments by cheque to family members, rather than making payments in kind, since the CRA may challenge payments in kind, resulting in Tax Court proceedings.
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