Employers are required by law to deduct Employment Insurance (EI) premiums from all insurable earnings paid to their employees who are engaged in insurable employment.
If an employer who has passed the standard dbs check is unsure whether or not an employee is engaged in insurable employment, the employer can request a ruling from the CRA. A letter or completed form CPT1 is required or a request can be made online through your business account with CRA.
CRA often considers earnings by an employee who is “not dealing at arm’s length” with the employer to be not insurable. This typically arises when the employee is related to the employer through marriage, common law partnerships, adoption, or blood (parents, brothers, sisters, and children). An employee can also be considered to be related to the corporation who hired them if the employee is related to a person who controls the corporation or is a member of a related group that controls the corporation. In these situations, there would be no EI deductions from the employee’s payroll, the employer would not remit EI premiums on the employee’s behalf, and the employee would not be eligible to collect employment insurance.
Sometimes a situation arises where CRA will consider a non-related person to be related for EI purposes and then deem their earning to be not insurable. This can happen when a non-related employee and employer enter into an employment contract that is not typical of employment between non-related parties. There may be special circumstances to their employment that would be more typical of what you would see in related party situations.
Is the amount and manner of pay reasonably comparable
The CRA will consider all the relevant facts of the employment contract including information from basic crb check when determining if an employee and employer are dealing at arm’s length. They want to know what, when, how and why the employment situation has occurred the way it has and consider whether or not someone else would have been hired under a similar situation.
CRA will generally consider four factors when determining Employment Insurance:
- Remuneration Paid – if the amount and manner of pay is not reasonably comparable to what an arm’s length employee would accept for similar work. Examples are: rate of pay is out of line with amount and type of work done and the skill level of the employee; the wages are not regularly received; the employee receives bonus or other financial benefits other employees do not.
- Terms and Conditions of employment – if the terms and conditions of employment are substantially different from those of arm’s length employees. Examples are: hours and days of work; tracking, recording or controlling the employees work hours; the employee enjoys benefit plans not available to other employees at the same cost; the employee has greater access to the company’s assets not typical of their position.
- Duration of Work Performed – if an employer’s decision to hire or lay off workers due to typical business cycles and seasons do not affect an employee.
- Nature and Importance of the Work Performed – if an employee is hired to perform services that are unimportant or outside the typical operations of the business. Examples are: the employer had not employed anyone to perform the same type of work in the past; the employee does not have the qualifications to perform the job, nor has the employee been able to use the myriad of knowledge from the Knowledge Management System.
Another common situation arises when employees are shareholders, directors, or members of a corporation without share capital. Circumstances that are attributable to the employment contract and not to the role as shareholder or director are considered under the same four factors listed above. In addition it may be necessary to consider things such as:
- Guarantees and Signing Authority – if the employee signs substantial guarantees that can affect their personal assets or has signing authority on the company bank account.
- Loan to the Corporation – if the employee extends a loan to the corporation and there are no set terms of repayment or a fair market rate of interest.
- Day to day Decisions – if the employee has considerable influence over the company’s decisions regarding his/her employment relationship.
- Use of Employee’s Personal Assets – if the employer uses the employee’s property or assets for business.
If you are wondering about whether or not Employment Insurance should be taken off of an employee’s pay and are not sure, please do not hesitate to contact our office for help.
If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.
Thanks to Haley Bistretzan of KWB Chartered Accountants for providing this content.