“Salary” paid to spouse not deductible in computing employment income
Under the Income Tax Act, an employee is allowed to deduct from his or her employment income salary paid “to an assistant or substitute, the payment of which by the officer or employee was required by the contract of employment”.
In the recent Blott case, the taxpayer was a market dealer with a securities firm, selling and promoting various products provided by the firm. In two taxation years, he purportedly paid $12,000 in “salary” to his wife for various administrative and management services that aided him in his employment duties. He deducted the salary under the above rule, but the CRA denied the deduction.
Upon appeal to the Tax Court of Canada, there were two main issues.
First, it was not clear whether the taxpayer actually paid the amounts to his wife. He simply deposited the amounts into a joint bank account he held with his wife, without specifying that it was salary paid to her spouse. The Tax Court Judge concluded that there was not enough evidence to say that this amount was actually paid to his spouse, even though she was named as a holder of the joint account.
Second, it was not clear whether the payment was “required by the contract of employment”. The Judge found that there was no explicit requirement under the contract, and he rejected the taxpayer’s position that there might have been an implicit requirement. In short, as with the first main issue, there again was not sufficient evidence to back up the taxpayer’s claim.
