Insurable Earnings For Family Members
The cost of employment insurance premiums can be significant, especially for smaller, family-owned businesses that employ family members. A key issue is whether these family members have "insurable employment." If the employment is not insurable, then no employment insurance premiums would be payable, and the individual could not claim benefits.
The Employment Insurance Act (EIA) defines the conditions under which an individual does not have insurable employment. For example, if an individual owns more than 40 per cent of the voting shares of the corporation, either personally or through a holding company, there is no insurable employment for that individual.
The EIA also provides that employment is generally not insurable if the employee is not at arm's length with his or her employer. The Income Tax Act definitions of arm's length and related persons are used for employment insurance purposes. For example, a spouse or common-law partner, a child or a child's spouse or common-law partner are all at non-arm's length with an employer who is an individual. Similarly, where the employer is a corporation, such relatives of an individual who controls the corporation would be considered to be at non-arm's length.
Despite a non-arm's-length relationship, however, the employee could still be deemed insurable depending upon the specific circumstances of the employment. The EIA deems two parties to deal with each other at arm's length if the circumstances surrounding the contract of service (including salary, position, duration, type of work and conditions) are substantially similar to what would occur if an unrelated person were to fill the position. There is a subjective assessment associated with the review. This means that if employment conditions are more or less favorable than what an unrelated person might experience, there is a possibility the Canada Customs and Revenue Agency would rule the employment as uninsurable.
The CCRA might, for example, consider a related employer and employee to be dealing with each other at arm's length if the the Canada Customs and Revenue Agency could reasonably conclude that:
- an unrelated worker would be employed under similar conditions;
- an unrelated worker would be paid in a similar manner for the same work; and
- an unrelated worker would be hired to do the same type of work.
In this situation, the CCRA would likely conclude that the employment is insurable, thereby requiring deductions and contributions. However, if there is something unique about the employment circumstances of the related employee, the CCRA may well determine that the employment is not insurable and would not require contributions or deductions for EI.
Once a determination is made, the employer and the employee have 90 days from the date of the decision to question it by sending an objection in writing.
If an employer wants to be clear as to whether an employment situation us truly insurable or not insurable, it is important to request a ruling from the CCRA. Opting out of Employment Insurance premiums is not automatic for related family members.
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