Does hiring family make sense? It depends on their skills and how it might affect family dynamics. But it can be smart from a financial perspective.

What it is

Employing a spouse or child.

Why you need it

To fill a necessary role.

How it helps

On the business side, Mark Goodfield, managing partner at Toronto accounting firm Cunningham LLP, suggests family members can show great loyalty as employees, and better understand that their hard work helps the well-being of the family. It also helps the family members you employ to build their résumés.

On the financial side, splitting income with a spouse in a lower tax bracket can save thousands in taxes and boost your net earnings. And paying wages to a school-age child can make more sense than covering his expenses from your own income.

Good to know

If you hire a family member, document the relationship in a written employment agreement, says Thomas Fellhauer, a tax lawyer at Pushor Mitchell LLP in Kelowna, B.C. “The pay, hours and other terms [should be] similar to what you would do for a non-family employee. That is very helpful in the event of a tax audit.”

It helps from a non-tax perspective as well. Treat the family member like you would any other employee. This sends a message to everyone that the same rules govern all staff, which helps morale. “No one likes to see another employee get special treatment solely for the reason that they are related to the boss.”

However, family members are sometimes required to work beyond 9-to-5. They might also have to assume more difficult tasks or higher-level responsibilities. Make sure these details are also reflected in the employment agreement, since it may support higher pay.

And if you pay the family member a salary, he must do work related to running the business. “The salary has to be reasonable in the circumstances—fair market value, or what you’d pay someone not related to do the job,” says Goodfield.

Tax assessors look closely at salaries paid to family members. For instance, CRA might investigate whether a spouse on the books ever steps in the office. Or it might interview a 16-year-old child to confirm what work he does at Dad’s office. The duties must justify the wages.

Who can help

Your accountant can advise on employment arrangements and salaries that are tax-beneficial. To determine fair market value for a position, talk to other employers or HR managers. Certain work, like if the employee has specialized skills, can justify a higher salary.

Stuart Foxman is a Toronto-based financial writer.