Want to save tax : Hire your family

Lately, I came across this excellent article written by Tim Cestnick, managing director of WaterStreet Family Wealth Counsel:

If your New Year's resolution is to improve your financial situation in 2008, start with some tax savings. Here are three strategies that could save you thousands in 2008.

Hire your kids

If you're not self-employed, consider setting up a home-based business - even part time. This will allow you to pay your kids for working.

Consider an example where you're able to earn sufficient part-time income to pay your child $5,000 to help. If your child has little or no other income, he's likely to pay no tax on that $5,000. In your hands, that $5,000 might have faced tax at as much as 46 per cent (which varies by province).

In this example, you would save $2,300 in taxes. If your child is heading to post-secondary school and can use that $5,000 to help pay for education, you will have effectively deducted part of your child's education costs.

You can also hire your adult children (18 or older in the year) to look after the younger ones (16 or younger in the year) and deduct the amount paid to your adult child as child-care expenses provided you otherwise meet the tests to deduct child-care expenses.
Similarly, consider paying your adult child to help in a move. If you're going to hire movers, why not make it a family member? The amount paid may be deductible as a moving expense if you meet the tests for deducting those costs. All of these ideas will create RRSP contribution room for your child, which will help save tax in the future.

Deduct common expenses

There are certain things you're likely paying for that may not currently be deductible on your tax return. I'm thinking of mortgage interest, property taxes, insurance, vehicle costs, computer expenses, subscriptions, meals and entertainment, and more. A part-time business earning even a few thousand dollars in revenue each year can open the door to deducting a portion of these costs.

Just another good reason to consider part-time self-employment in 2008. And if you have no idea what type of business to create, consider a multilevel marketing business selling candles, jewellery, cosmetics, sports equipment - whatever. It may not sound exciting, but these are generally legitimate businesses that provide an opportunity to earn some revenue.

Hire an assistant

If you're an employee who could use the help of an assistant, and have some flexibility to negotiate with your employer, consider coming to an agreement with your employer that will require you to hire and pay for your own assistant. If you're able to then hire your spouse, even on a part-time basis, to assist in your work, you'll be able to deduct the compensation paid to your spouse directly against your employment income.

It's a direct transfer of income from you to your spouse. You'll need your employer to sign Form T2200 annually as proof of the arrangement, and I'd also recommend a letter signed by your employer confirming the agreement. Make sure your spouse is actually doing some work to justify the compensation.