Consider the situation where Persons A and B are a married couple and own 60% and 40% respectively of Corporation A (A Co.). They are also both employed by A Co. and, therefore, receive a salary. Will the salaries that they receive be considered insurable for Employment Insurance (EI) purposes? That is, would EI withholdings have to be remitted to CRA, and would the person would be entitled to receive EI benefits?
The EI legislation is complex, however, it can roughly be boiled down to the following:
For EI to apply, the first step is to ensure that the individual controls no more than 40% of the voting shares of the business. In this situation, since A owns 60%, she would not be earning insurable amounts. However, B may still be subject to EI.
The second step is to determine whether B is related to a person who either controls the employer corporation, or is a member of a related group that controls the employer corporation. Immediate family members and their spouses are generally considered related to each other. In essence, if A and B control more than 50% of a corporation, their earnings are not considered to be insurable.
There is, however, an exception to the second step. If an arm’s length person would have been offered, and accepted the same circumstances, or terms and conditions of employment, as the related individual (Mr. A), then earnings once again become insurable. This exception is not applicable to individuals deemed not insurable by the first step (the individual controls more than 40% of the voting shares).
In a February 4, 2016 Tax Court of Canada case, a 40% owner (married to the 60% owner) intended to rely on this exception. Although there were many factors both for and against his position, he was not successful in showing that his employment was insurable. During testimony, the 60% owner (his spouse) indicated that she laid off her husband because he was a “big salary”, which in the Court’s view was suggestive of a non-arm’s length arrangement. In other words, his contract was not similar to one that would be offered to an arm’s length party. Whether or not a contract is similar to an arm’s length one can be complicated and is frequently the subject of court cases.
Action Item: The stakes are high in these scenarios. If the owners consider the employment insurable, but it is later determined not to be, EI benefits received will have to be paid back (though the payor may be eligible for a refund of some EI remitted). In the opposite scenario, the owners will be liable for unremitted EI. Discuss your situation with a professional prior to making the determination to avoid costly errors and administrative complications.
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