“the overall cost of EI premiums can be significant.”
Family-owned businesses often pay Employment Insurance (EI) premiums for family employees without properly considering whether premiums are required. Since the maximum combined employer/employee EI premium for 2013 is $2,138.69 per employee ($891.12 – employee; $1,247.57 – employer), the overall cost of EI premiums can be significant. In many situations the employee will never seek EI benefits or, in family situations, may not even be eligible (even if premiums were paid).
If the employee owns a 40% or more voting interest in the company, EI coverage is not available, and no EI premiums should be paid. In other cases, one must look further to determine whether a family employee will be covered by EI. If the terms of employment for the employee are not of a nature that would be offered to an arm’s length employee, the employee will normally not be insurable for EI purposes. Some considerations are:
- Does the employee have control over their work schedule?
- Can the employee come and go as they please?
- Is the employee’s entitlement to vacation or paid leave different from an arm’s length employee?
- Is the employee paid on a regular basis?
- Does the employee receive more salary than an arm’s length employee with similar qualifications?
- Does the employee have an equity interest in the business?
- Are there any other factors in the employee’s employment that differ from arm’s length employees?
- What is the nature of the employee’s duties?
An employer or employee can request a ruling regarding EI eligibility by filing a Form CPT1, Request for a Ruling as to the Status of a Worker under the Canada Pension Plan or Employment Insurance Act. The request should be sent to the CPP/EI Rulings Division of the local CRA Tax Services Office.
If the CRA rules that the employment is not insurable for EI, the company and the employee will not have to pay EI premiums. As noted above, for 2013, this will result in combined savings of up to $2,138.69 per employee. If the terms of employment do not change, the savings would continue each year. Of course, the side effect is that the employee cannot claim EI benefits if the employment terminates.
The company can also apply for a refund of the past three years’ over-deducted EI premiums by filing a Form PD24, Application for a Refund of Overdeducted CPP Contributions or EI Premiums, with the CRA. If the request is accepted, the company will receive a refund of its over-payments and will be required to issue amended T4 slips (showing exemption from EI) to the employee. The employee should then file T1 Adjustment requests asking for a refund of EI premiums withheld on exempt earnings.
Your TSG representative would be happy to further discuss these issues with you.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.