Expect the CRA to come knocking if you ‘hire’ your spouse to split income

financialpost.com:

With taxpayers in eight out of 10 provinces facing a 2024 top marginal personal income tax rate exceeding 50 per cent, it should come as no surprise that some couples are looking at ways to income split, especially when one spouse or partner is in a much higher tax bracket than the other. Consider, for example, a British Columbia high-income taxpayer facing a top marginal rate of 53.5 per cent. If their spouse or partner earns under about $55,000, their marginal rate is only 22.7 per cent — a spread of more than 30 percentage points.

There’s a variety of ways to legally split certain types of income with a spouse. For example, when it comes to retirement income,  pension income splitting or CPP/QPP sharing can be effective. For investors, using a  prescribed rate spousal loan  to have any excess returns above the prescribed interest rate taxed in the hands of the lower-income spouse was the way to go when the prescribed rate was only one per cent or two per cent. With that rate now at five per cent as of July 1, 2024, finding an investment with a guaranteed return in excess of that rate is challenging, which is why we’ve seen very few new spousal income splitting loans set up in the past year.  

But one method of income splitting that’s often tried, but doesn’t always pass muster with the Canada Revenue Agency, is to “hire” your spouse or partner to either work in your business or, if you’re an employee, to become your “assistant.” While this can be a tax-effective strategy when it involves legitimate work and appropriate pay, the CRA is often quite skeptical of spousal employment arrangements, as one taxpayer recently found out in a tax case decided last month.  

Under the Income Tax Act, an employee is permitted to