I have hired a family member to work in my corporation and want to know whether I should deduct EI or not?
Under the Employment Insurance Act, employees who are related to their employer (individual or corporation) might not be in an insurable employment. This means that they would not have EI premiums deducted from their pay and would not be able to get EI benefits. However, an employee that is related to the employer can be in an insurable employment if it is reasonable to conclude that the employer would have hired a non-related person under a similar agreement (contract of employment). This means a similar contract with a person at “arm’s length”.
If the related person you employ controls more than 40% of the corporation’s voting shares, then they cannot be in an insurable employment and EI is not deducted.
If the related person controls less than 40% voting interest in the company then EI should be deducted if it is reasonable to conclude that you as the employer would have hired a non-related person under a similar agreement based on:
- Terms and conditions of the employment, such as the hours of work
- Length or duration of the employment (permanent or casual)
- Nature of the work being done by the employee
- Importance of the work being done.
The key here is that if the related person were to leave your employment, you would have to hire an “arm’s length” person to replace them. The replacement would have to receive the same type of pay rate, hours, tasks, etc as the related person.
This situation is “touchy” and we have seen Canada Revenue Agency (CRA) rule both ways. You may request a ruling from CRA on whether you should deduct EI or not. If you have further questions, please contact us for our help on this issue.Download a copy of this issue