T4 or T4A for Common law Partner

This is a 2021 Tax year question problem Should my client T4 or T4A her life partner?

My client has an Online business, no partnership plus mid 60"s T4 income job. She is on mat leave and receiving benefits. Her partner has left his job to assist with the her business while she is taking care of the newborn.

We are looking for an honest solution to avoid EI Maternity claw backs. Would she best to T4A or T4 her partner thereby reducing her earned income from the business and facing clawbacks? My thought is T4 for him. Simplify his tax return and avoid partnership challenges or trying to hide income.

Thank you for your knowledge and help

T4 would seem a good option, as always. He could probably be exempt for EI if so desired.

Why issue T4 or T4A at all? Just split the business income with the spouse on the T2125. That would be the easiest. Use an appropriate percentage based on the amount of involvement for each spouse, NOT based on avoiding EI repayment - that could be seen as tax avoidance.

Issuing a T4 (next February) means she must set up a payroll account (now), and withhold and remit payroll deductions every month. The tax effect is basically the same either way.

The concern with the split on the T2125 is that it is 100% hers and what will CRA say when the split reverts? T4 orbT4A is black and white whereas I fear that changing the business % year to year for tax saving reasons would raise red flags.

Sounds like you have a pretty good explanation for the change in % - it’s not for “tax saving reasons”; it is because the spouse is actually contributing to the business for this year. Even if the % change does raise a flag, the first thing CRA will do is contact you or your client to ask what happened - might be a simple phone call from them. I’ve had several such queries resolved this way. If they want more “proof”, I’m sure the client could produce the birth certificate, etc.

If you set up a RP account and pay an employee for a few months, you (or the client) will have to do the extra work of calculating paycheques, making remittances, preparing the T4, closing the RP account when everything is done. In my mind this is more work than responding to a “possible” query from CRA…

it does take extra work doing things right…

A partnership is a partnership. A proprietorship is a proprietorship… You cannot just switch these back and forth…

Good point, Bert. I never thought about that. Legally, I guess there is a difference. But, does it matter for tax purposes?

I have many clients that operate unincorporated businesses where both spouses work in the business. Some are registered with the provincial registry as proprietorships, and some are not registered at all. None are registered as partnerships, and none file T5013s. I have not seen CRA or any regulatory body question them about it. I have one client that operated an actual partnership with another arms-length individual for many years - each reported the partnership income and expenses on their own T2125, and reported the name and SIN of the other partner, and the partnership percentage as 50% (so the tax software automatically calculated the 50% attributable to the individual). One of the partners retired recently and the other continued the business as 100% owner. No complaints from CRA.

Have you seen a situation where it was necessary to define the business as one or the other? (partnership vs proprietorship)

Another couple thoughts:

If the business owner wants to pay her spouse based on an hourly wage, then it makes sense to set him up as an employee, rather than figuring out (at the end of the year) what percentage of the annual business activity was attributable to the “temporary” business partner.

Or, if the business owner is considering hiring her spouse to complete a number of pre-defined deliverables for a flat fee, then a T4A might be more appropriate - this means the spouse is acting as a private contractor, and would not be an employee.

Payroll really isn’t that hard…

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Except that someone has to remember to DO it regularly, which is easier said than done, especially when your only employee is your spouse and you don’t think it’s a big deal actually PAY him on a set schedule (like, “yeah, yeah, I’ll get around to calculating your paycheque next week…”)

Or you realize it’s the 16th of the month and you haven’t made your payroll remittance yet…
etc

Thank you all for the input.

I will be suggesting putting him on payroll, my initial thoughts. This way she can stay on mat leave and not worry about having the EI benefits clawed back or bringing him in as a partner.

Nice to have the input from others.

Tom

#GOJETS

These people are clearly not enthusiastic about paperwork.
They are prepared to cohabit informally together, to informally have babies together, but have not given any consideration to a formal mattiage, or any marriage contract. (Nor any paperwork about enteing into a business partnership).
Potentially other significant challenges may (will?) result from thst approach in the future

However, for the purposes of an undocumented proprietorship for tax purposes, she might consider whether to enter into an employment contract with the baby’s father .
If she does so, she should provide evidence of same to the tax accountant.
That would result in a T4 as refernced above.

In a husband/wife partnership, I have never registered the partnership as such. But they may very well be good reasons to register a partnership between two siblings, and I would suggest the paperwork would not be to serious to produce the desired results and clarity.

I have found that the closer the relationship, the more need for clearly defined rules to avoid hurting that relationship.

@joe.justjoe1, you are reading too much into what was said above. They may have a marriage contract or a MOA for their life in common. We don’t know if they are married or how much paperwork they have in regards to their familial partnership and it does not matter for the purpose of the question. The question is much more basic than that,

I would certainly agree with this. I may agree to a change of split in a partnership arrangement if circumstances warrant a change, but to change freely to suit tax purposes would be considered aggressive, after the fact, tax planning and would not be acceptable with CRA.

Obhorst, you did not read the OP carefully…
We do know what they are not.

Also, just because a client or a tax preparer or bookkeeper is not aware of all the very significant legal problems does not mean that they do not exist.

I do not prepare tax submissions by making things up as I go along, and nor should anyone else…