Hiring Family in Your Restaurant: Tax Rules & Payroll
Family working in your restaurant? Learn CRA's reasonable compensation rules, T4 requirements, and the risks of paying family under the table.
- Family members must be paid "reasonable compensation" for actual work
- Paying cash without T4s is illegal and risky
- Income splitting with spouse can save taxes - if done properly
- Children under 18 have special rules
- Proper documentation protects you in an audit
The Reality of Family Restaurants
In many Punjabi-owned restaurants, family is the backbone of the operation. Mom runs the kitchen, dad manages the floor, kids help on weekends, and uncle covers when you need a break.
This is normal. This is how family businesses work. But CRA has rules about how you pay family - and ignoring them can be costly.
CRA's "Reasonable Compensation" Rule
- Payment must be for actual work performed
- Amount must be reasonable for that work
- You can't pay spouse $80,000 if they just answer phones
- Compare to what you'd pay a non-family employee
What's "Reasonable"?
- Spouse works full-time as restaurant manager: $45,000-$65,000 โ
- Spouse drops by occasionally, gets paid $50,000: โ Not reasonable
- Adult child works 20 hrs/week as server: $15-$18/hr โ
- Adult child doesn't work, gets paid as "manager": โ Not allowed
Risks of Paying Cash (Under the Table)
Paying family (or anyone) cash without proper payroll is tax evasion. Consequences include:
- Back taxes + interest (for you AND family member)
- Penalties of 10-50% of unpaid taxes
- CPP/EI penalties for employer portion
- Potential criminal charges
- Family member loses RRSP room, EI eligibility, CPP credits
Proper Payroll for Family Members
- Set up proper payroll account with CRA
- Calculate and withhold income tax, CPP, EI
- Issue T4 slips by end of February
- Remit source deductions monthly
- Keep timesheets documenting hours worked
- Have written job description on file
Special Rules for Children
- Work must be age-appropriate and legal
- Must actually perform the work
- Payment must be reasonable for the work
- Subject to provincial child labour laws (hours, times)
- No CPP contributions until age 18
- No EI deductions if employing parent
Appropriate Work for Teenagers:
- Bussing tables
- Washing dishes (16+)
- Hosting/seating
- Cleaning duties
- Food prep assistance (with supervision)
Income Splitting with Spouse
This is a legitimate tax planning strategy - when done properly.
Example: Income Splitting Benefit
- Restaurant nets $150,000/year
- Option 1: You take it all = ~$45,000 tax
- Option 2: You take $75,000, spouse (who works) takes $75,000 = ~$30,000 tax
- Tax savings: $15,000/year
Your spouse must ACTUALLY work in the business, and the salary must be reasonable for their role. "Paying" a spouse who doesn't work is tax fraud.
Documentation Checklist
- Written employment agreement for each family member
- Job descriptions outlining duties
- Timesheets or time clock records
- Pay stubs showing gross pay and deductions
- T4 slips issued annually
- Evidence of actual payments (bank transfers, not cash)
- Comparison to market rates for similar positions
Incorporating Your Restaurant
If your restaurant is incorporated, you have more options:
- Pay salary (employment income) - creates RRSP room
- Pay dividends (if shareholder) - no RRSP room but lower overall tax
- Mix of salary and dividends for optimal tax result
- Spouse can be director and/or shareholder
Family Working in Your Restaurant?
Tax Punjabi can set up proper payroll and ensure you're maximizing tax benefits legally.
This article is for educational purposes only. Consult a tax professional for your specific situation.