Farm Wages

 
 
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 A farmer can deduct reasonable wages and wage costs paid to family members from farming income.
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Tips and Traps

  • Canada Pension, income tax and perhaps employment insurance deductions must be withheld and remitted by the employer. Note that Canada Pension need not be withheld for individuals under the age of 18.
  • The employer is also subject to employer contributions of Canada Pension and employment insurance.
  • Generally, withholdings for Canada Pension Plan (CPP) start at $3,500 of annual wages and income tax at about $11,474 (in 2016). Employment insurance (EI) premium withholdings may also be required.

Farm Wages Paid to a Spouse
  • Wages may be paid once a year to minimize paperwork.
  • Wages will only be deductible if they are reasonable, based on the work performed. Such services may include bookkeeping, filing, other administrative work, picking up supplies or general farm labour, and the salary should be similar to that which would be paid to arm’s length party for the same services. The fact that family members may be on 24-hour call to provide these services may assist in supporting a more than nominal salary.
  • Payment of wages to family members will provide earned income that will allow them to contribute to a Registered Retirement Savings Plan (RRSP).
  • Where the spouse is employed on other than usual terms of employment, it may be possible to save the employee and employer portion of employment insurance on wages paid to a spouse.
  • Very often this is so in a farm-spouse situation since it would be difficult to find a suitable replacement employee to perform all the tasks required from the spouse at any time of the day or night. Such tasks may include running to get supplies, helping with general farm labour, bookkeeping and preparing meals for hired hands. In addition, the terms of employment are often arranged to have payment of the salary once a year, and it would be difficult to attract third-party help under these circumstances.
  • Caution must be taken to ensure the salary is not unreasonable - an unreasonable salary would render it not deductible for income tax purposes.
  • Each situation should be evaluated carefully, and a ruling from the Employment Insurance Commission could be obtained to determine whether the salary is insurable or not. This ruling can be requested by completing Canada Revenue Agency form CPT-1 (08). If a ruling is received that employment is not insurable and employment insurance premiums have been paid in the past, a request for a refund of those premiums can be made using form PD24.

Hiring Employees vs. Contractors
The difference between hiring an employee and a contractor is important for several reasons:
  • An employer must withhold source deduction amounts for tax, Canada Pension and employment insurance for an employee.
  • A penalty and interest may be assessed for failing to withhold these amounts. Generally, the Canada Revenue Agency would go back at least three years in assessing these withholdings and associated interest and penalties. If an individual is assessed as an employee and does not pay the required income tax, the Canada Revenue Agency is entitled to recover this amount from the employer.
  • If the relationship is determined to be one of employment, then the worker will be restricted in deducting only those expenses allowed for employees under Section 8 of the Income Tax Act.
  • Goods and Services Tax applies to payments made to contractors (unless they are a small supplier) but not to payments made to employees.

Whether an individual is engaged in a “contract of service” (employment) or a “contract for services” (independent contractor) is a common law concept that has evolved over the past few centuries. There is no set rule in any legislation to assist in deciding whether it is better to hire employees or contractors. It is best to study the individual circumstances of each situation.

If payers or workers are uncertain whether the Canada Revenue Agency views the relationship to be one of employment, they may apply to Source Deductions at the District Office on form CPT1 for clarification. This step would eliminate the uncertainty, but experience shows that the Canada Revenue Agency has a predisposition to find these relationships to be ones of employment.

Payroll audits often result where a former worker applies for employment insurance (to which an independent contractor would not be entitled) and claims that the worker should be entitled to employment insurance benefits.

The courts seem to have developed four traditional tests to determine whether a worker is an employee or a contractor:

  • control
  • ownership of tools
  • chance of profit or loss
  • integration

While none of these tests alone determines whether employment or contractor status exists, the Canada Revenue Agency seems to focus on the control test.
Some of the favourable factors for contractor status include:
  • written agreement
  • own equipment used
  • own overhead expenses
  • investment of some capital
  • payment on presentation of invoice
  • non-exclusive contract
  • other business income sources
  • not required to do tasks personally
  • discretion with regard to the amount of work done, when and how it is done

Some of the unfavourable factors for contractor status include:
  • payment at payroll intervals
  • set hours of work
  • paid vacation time
  • liability for acts assumed by employer
  • use of company vehicle
  • services performed at work place
  • little control over how work done
  • entitlement under employee benefit plans

A T4 should not be prepared for a contractor.
 
 
 
 
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For more information about the content of this document, contact Joel Bokenfohr.
This document is maintained by Nicole Halvorson.
This information published to the web on July 23, 2014.