Tax Articles
Hiring a Family Member? Should You Pay EI – or Not?
Business Times
Kais Aziz, CA
When you have your own business, hiring family members can provide personal, tax and financial benefits – for the relative, for you and for your business. As well, many business owners are pleased to learn that employment insurance (EI) premiums do not have to be paid on the salary of an employee who is a family member. Under the Employment Insurance Act, the relationship is considered to be non-arm’s length – “a relationship between individuals connected by blood, marriage, adoption, or otherwise.”
But what if your family-member employee wants to have the option of receiving EI benefits? Say you are hiring your daughter who is pregnant, and she anticipates taking parental leave in the next few months. Or you hire your spouse, but he thinks he may need to take compassionate care leave sometime in the future to look after an elderly parent.
While an employee who is a relative is presumed to have a non-arm's length relationship with the employer, under certain circumstances the Canada Revenue Agency (CRA) will treat the relationship as one that is arm's length. In this case, both employer and employee pay EI premiums, and the employee can collect EI benefits.
If you can convince the CRA that you would have entered into a similar employment contract with an employee who was not a relative, then it will consider the employment to be arm’s length. When making a ruling on a particular situation, the CRA looks at the nature of the employment, rather than the relationship between the parties. Thus if a family-member employee anticipates applying for EI in the near future, he or she might benefit from working under an arm's length arrangement where both employer and employee pay EI premiums.
If you wish to establish this type of arrangement, you should get a ruling from the CRA.
The agency will look at the nature of the employment agreement to determine whether the terms and conditions of employment are reasonable. The CRA will review remuneration, terms and conditions of employment (such as hours of work and duties), the duration of the work and the nature and importance of the work performed. Therefore, you should have a documented employment contract for your family member, which covers these criteria.
If the CRA conducts a review and concludes that you would have offered a similar employment contract to an unrelated person, the employment relationship would be considered to be non-arm’s length. In this case, you would withhold EI premiums from the salary you pay your relative.
There is no minimum or maximum age limit for EI premiums; therefore if you hire your 16-year-old son or your 75-year-old mother, you would still pay EI. For 2007, employees pay EI of 1.8% on insurable earnings up to a maximum of $40,000. The maximum amount an employee would pay in 2007 would therefore be $720. The employer generally pays 1.4 times this amount; thus your 2007 maximum contribution per employee would be $1,008.
To EI or not to EI: don’t forget that question if you hire a family member.
Kais Aziz is a senior tax manager with BDO Dunwoody LLP (www.bdo.ca). One of Canada’s leading accounting firms, BDO helps entrepreneurs and family businesses succeed. If you have questions about this article or you would like to receive BDO’s Tax Factor newsletter, contact Kais at (905) 270-7700 or kaziz@bdo.ca.
