Lessons from a Tax Court Case on Wrongful Income Splitting

It’s all fine and dandy until the CRA comes knocking, asking for proof of your spousal payment expenses. 📊 This was the recent case of Jean-Marie Robillard v. His Majesty the King (2024 TCC 90), concluded on Oct 11, 2024.

The Case in Brief:

The Setup: Jean-Marie Robillard took income as a commissioned salesperson from his own corporation that he had 49% ownership in. He claimed tax deductions for 2016 and 2017. These deductions were for amounts he said were paid to his spouse, Liette, for business services (e.g., scheduling appointments) and to a contractor, Fernand Doucet, for customer referrals. Robillard claimed $20,000 each year for his spouse's work and additional amounts for Doucet’s referrals.

CRA’s Challenge: The CRA denied the deductions, flagging the payments as unsubstantiated and lacking a clear business purpose:

- For the spouse’s payments: CRA highlighted that no specific payments were made to Liette for services. Instead, Robillard suggested that the amounts were her share of common household expenses (like the mortgage). This arrangement lacked documentation to show a clear business payment structure.

- For the contractor’s payments: While some invoices were provided, CRA questioned the payments because they were made in cash without supporting records, like receipts or proof of deposits, making the transactions hard to verify.

The Tax Issues and Court’s Ruling:

1. Deduction for Spouse’s Services:

- CRA’s Argument: The CRA argued that without evidence of actual business-related payments, the expenses couldn’t qualify as deductions. Shared household expenses or mortgage payments don’t constitute a business expense.

- Court’s Ruling: 🚫 The court sided with CRA, finding that Robillard hadn’t provided enough evidence to prove a working relationship or show that specific payments were made to Liette. Without pay stubs, a job log, or direct transfers, the court ruled the $20,000 deductions were unsupported and not allowable.

2. Deduction for Contractor’s Referrals:

- CRA’s Concerns: Cash payments to Doucet for customer referrals raised red flags due to insufficient supporting records, like bank statements or cancelled checks, and no description of the work performed.

- Court’s Verdict: ✅ Despite the weak documentation, the court accepted Robillard’s deduction for Doucet’s payments based on his credible testimony. However, the court emphasized the importance of keeping clear, documented records even in informal contractor situations.

Key Takeaways for Business Owners:

1. Documentation is King 👑 

Keep detailed records for any business expense, especially when family or non-arm’s-length parties are involved. Maintain contracts, receipts, payment records, and any logs of work completed.

2. Direct Payments Only 📲 

Business expenses need to be clear-cut. Joint expenses, like mortgage payments, don’t qualify as business deductions—even if a spouse is involved in the business. Make direct payments for services and keep proof of these transactions.

3. Cash Payments Raise Red Flags 🚩 

Cash can look suspicious, as it’s harder to trace. Use cheques or bank transfers to ensure traceable records of business expenses and protect yourself in case of CRA audits.

4. Family Payments Need Special Attention 🏠

When paying family members, document everything as you would with any other employee or contractor. Ensure clear records of payment and services rendered to back up claims with CRA.

In Summary: 

This case is a wake-up call for any business owner to prioritize documentation. The CRA expects thorough records, and without clear evidence, even legitimate claims are at risk. Protect your business by keeping all records—whether you’re working with family, contractors, or just managing day-to-day expenses.

Thank You For Reading. See You Next Time!

Think Team🙏

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