Rental Expenses, paying your children.

It is clear that when you are paying your children, you need to have good records for what you paid for. This is not any different than any other discretionary business expense. You have to have proof of payment and sufficient details to prove that you received real value for that payment.

If your bookkeeping system does not catch this important information at data entry time, you may lose your deduction. You can hire your kids but the expenses have to be real and reasonable. In the following case the judge appeared a bit biased in only allowing $500, but the taxpayer has to accept responsibility of keeping good records. Audit Ready Books avoids these issues.

In a recent case, Dilys Massicotte vs. The Queen, Nov. 27, 2009, the taxpayer claimed a certain rental expense.
The expense is question were amounts paid to the taxpayer’s sons; aged twelve and fourteen to perform maintenance and cleanup work at her rental properties.

The taxpayer paid $7,500 to each of her sons per year. The total amount of $15,000 exceeded her annual gross rent. The rental loss for those two years also exceeded $15,000. The CRA disallowed the $15,000 expense for those two years. Naturally as they don’t like the idea of paying your family.

The judge acknowledged the taxpayer had rental business problems. The city had issued infraction notices regarding the property’s poor upkeep and non-removal of snow from the sidewalks. A tenant was evicted in 2004 and left her possessions behind. Removing her contents required multiple trips to the dump. The eviction’s aftermath also required extensive cleaning, repairing and refinishing of the floors.

The taxpayer paid her sons $12 per hour during those two years. The judge noted that amounted to 13 hours of work every weekend per child. In reality, the working weekend’s hours had to be longer than 13 hours after discounting certain non-work weekends due to birthdays, special occasions and hockey practices. The children did not work during the weekdays.

The rental property was situated about 30 to 35 km from the taxpayer’s home which would have required the taxpayer to drive to the property. The taxpayer claimed this travel time as part of the working hours for the kids.

The judge felt that the $12 per hour rate was on the high side and wondered if the paid travel time was reasonable for local work. In the end, he ruled the taxpayer did not provide him with sufficient evidence to show how each child could have worked more than 13 hours per weekend during those two years.

He acknowledged the children did provide valuable services and allowed a flat deduction of $500 per child for each of those two years.
The bottom line here is that if you don’t know how to keep audit ready books, you better start learning. To find out more go to [1] www.taxauditsolutions.ca