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Canada
Pension Plan (CPP) and Employment Insurance (EI) ->
Don't pay unnecessary employment (EI) insurance premiums
Employment Insurance (EI) Premiums are not Payable on Some Wages
Wages paid to some shareholders and family members are not insurable, and these employees cannot collect employment insurance benefits. Some other types of earnings are not subject to EI premiums, such as "direct" tips and gratuities. See below for a link to the Canada Revenue Agency special payments chart for more information.
a. You may not have to pay EI premiums for employed family members.
Employment Insurance Act s. 5(2)(i), s. 5(3)
The Employment Insurance Act S. 5(2)(i) states that employment is not insurable if the employer and employee are not dealing with each other at arm's length (determined in accordance with the Income Tax Act). However, the employment will be deemed to be insurable "if the Minister of National Revenue is satisfied that, having regard to all the circumstances of the employment, including the remuneration paid, the terms and conditions, the duration and the nature and importance of the work performed, it is reasonable to conclude that they would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length."
Tax Court cases:
- Locke vs Minister of National Revenue, January 2005- McDonnell Consulting Corporation vs Minister of National Revenue, January 2005:
The Judge in the McDonnell Consulting case wrote "This is certainly not a case of employment of convenience being created for the benefit of members of the family so that they could take unfair advantage of the employment insurance system. Nevertheless, the terms of the Act are reasonably clear, and when related parties enter into employment contracts they must be scrupulous to see that the terms do not differ from those on which the employer employs other workers, or on which the workers could find work with other employers, if they wish the employment to be insurable under the Act."
b. Shareholder's wages may not be insurable.
Employment Insurance Act s. 5(2)(b)
S. 5(2)(b) of the Employment Insurance Act states that "the employment of a person by a corporation if the person controls more than 40% of the voting shares of the corporation" is not insurable employment.
Recovery of EI Premiums or CPP Contributions
If you have been paying EI premiums on the above types of non-insurable employment, you may be able to recover some or all of the premiums paid. See our articles:
Recovery (by an employer) of overpayments of CPP contributions or EI premiumsHow do I (an employee) get back overpaid CPP or EI premiums?
Canada Revenue Agency (CRA) Resources
Special Payments Chart - what type of payments are and are not subject to CPP, EI or tax deductionsMeaning of "not dealing at arm's length" for purposes of the Employment Insurance Act
How to obtain a ruling for CPP and EI purposes - if you are not sure if the employment is insurable or pensionable
Tax Tip: Don't pay unnecessary employment insurance premiums, but review circumstances carefully.
Revised: December 28, 2020