Ask an accountant: Employment insurance and related individuals

Francesca Giroux, CGA
For the Lakeside Leader

When employing an individual that is related to you it is important to review whether or not that individual is required to pay Employment Insurance (EI) premiums. Employees are related to their employer if they are related by marriage/common-law partnerships, adoption or by blood. Due to this relationship the Canada Revenue Agency (CRA) deems that the employee and employer do not deal will each other at arm’s length and any employment resulting is not considered to be insurable. However, in certain employment relationships a related employee may be considered to be insurable if the CRA is satisfied that the employer and the worker would have entered into a similar employment relationship had they been dealing at arm’s length. The CRA will see if the employee is receiving a rate of pay that is reasonable, if it is comparable to other employees performing similar work, if the employee is paid with the usual frequency and under the same procedures as other employees, if the employee’s hours and days of work are reasonable, if the employer’s method of recording and tracking the hours the employee worked is similar to that used for other employees, and if the employee possesses the necessary skills and qualifications that other employees would possess to perform the required work.

To be certain that an employee is insurable, the best thing to do is obtain a ruling for Canada Pension Plan and Employment Insurance purposes, which is an official decision issued by an authorized officer of the CRA. To obtain a ruling the employee, employer or their authorized representatives must write a letter or fill out form CPT1 – Request for a Ruling as to the Status of a Worker – under the Canada Pension Plan or Employment Insurance Act and attach supporting documentation explaining the employment situation. Once a ruling has been requested, the employer and the employee may be contacted to discuss the details of the employment relationship, and request additional support documents such as, payroll records, or employment contracts. After the ruling has been made, the CRA officer will send a letter to the employee and employer informing them of the decision. There is an appeal process for every ruling.

Please e-mail your questions to [email protected].

Information provided is of a general nature. As each individual or company’s situation is unique, you may wish to consult with your CPA for information specific to your own needs.

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