News

The following article appeared in the National Post recently.

The writer of the article is a senior manager of one of Canada’s major accounting firms.

His comments about EI are relevant.

  • You could try and request a ruling from CRA on your own – probably not a wise idea considering the complexity involved.
  • You could hire and pay your accountant his fee charges to do this for you with no guarantee, or better yet why not have the experts at Sugar Consulting Services do it for you on a contingent success basis being you only pay if we succeed.

Be cautious about EI premiums

Family member usually are not eligible

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Should your family-run business pay into EI for relatives?


by George Singh, Special to Financial Post,  Jul 23, 2012

 

Determining whether there is a non-arm’s length relationship between the employer and employee can be complicated. Employees who are closely related to their employers are usually not dealing at arm’s length. These relatives include a spouse or common-law partner, children, parents, and brothers and sisters.

Is your company paying too much EI? Many family-run companies fail to realize family members working in the business are usually not eligible to collect Employment Insurance if they’re laid off for any reason, including shortage of work. That means neither the company nor the employee should be paying EI premiums.

Premiums can cost the employee and employer more than $2,000 each year. For example, in 2012 employers will pay $1,176 for each insurable employee who earns about $46,000 or more and the employees will each pay $840.

However, there is a saving grace: Employers and employees who have overpaid may be able to claim refunds going back three years. One family-owned company, KPMG works with has employed about 20 members of the owners’ extended family for the past three years. The company and the employees recently received a refund of more than $100,000 for EI premiums paid during that time.

The rules are intended to prevent abuse of the EI system by stopping employers from creating artificial employment situations for family members.

But how is eligiblity determined? An employee is not eligible to claim EI benefits and thus does not have to pay premiums if he or she controls more than 40% of the corporation’s shares or if the employee and employer are not dealing at arm’s length.

The 40% share ownership rule is fairly straightforward, but determining whether there is a non-arm’s length relationship between the employer and employee can be more complicated. Employees who are closely related to their employers are usually not dealing at arm’s length. These relatives include a spouse or common-law partner, children, parents, and brothers and sisters.

If the employer is a corporation, employees are not at arm’s length if they are related to a person who either controls the corporation or is a member of a related group that controls the corporation. For example, a related group that controls a corporation could be three siblings, each of whom owns a third of the company’s shares.

When ruling on a particular situation, the Canada Revenue Agency looks at the nature of the employment along with the relationship between the parties. As such, employees who aren’t related to their employers or who aren’t immediate family members, for example, nieces and nephews, can also be non-arm’s length. To determine whether these employees are not dealing at arm’s length with their employers, the CRA considers the circumstances of their employment.

In some situations, relatives can be considered to be at arm’s length if the circumstances of their employment are substantially similar to those that would exist if they were dealing at arm’s length. These employees would pay EI premiums and be eligible for benefits if they were laid off. If you can convince the CRA that you would have entered into a similar employment contract with an employee who was not a relative, then it will consider the employment to be arm’s length.

To determine whether an employee is not dealing at arm’s length with the employer, the CRA looks at a long list of factors. For example, does the employee’s pay reasonably compare to that an arm’s-length employee would accept for similar work? Does the employee receive bonuses or benefits other employees do not get? Does the employee work significantly more or less hours than other employees, or on what would normally be a day off with no extra pay? Are the employee’s hours tracked in the same way as other staff?

Other factors include whether the employee has access to the business’s assets that other employees in similar positions do not, and whether the employee has signing authority for company cheques and guarantees.

Unfortunately, companies and employees may only discover they have overpaid EI premiums when the employee is laid off and finds out he or she cannot claim EI benefits.

If you’re not sure about the arm’s length status of any of your company’s employees, you can request a ruling from the CRA. The CRA may ask for more information along the lines described above to make its ruling.

George Singh on tax is a senior manager in KPMG Enterprise’s Indirect Tax practice in Toronto.

Posted in: Entrepreneur, Taxes Tags: Columnists, Employment Insurance

Who’s Eligible for an EI Refund?

  • Children - Sons and daughters
  • Spouses - Husbands and wives
  • Parents - Mothers and fathers
  • Siblings - Brothers and sisters
  • Non-related persons

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