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Employment Insurance (EI) for the Self-Employed — ConnectCPA


Generally speaking, self-employed individuals are not required to make contributions to employment insurance (‘EI’). However, it is important to understand the exceptions to this ‘general rule’.

The EI program provides temporary income support to unemployed workers while they look for employment or to upgrade their skills. The EI program also provides special benefits to workers who take time off work due to specific life events: Illness, pregnancy, caring for others, etc.

In this post, we attempt to explain how self-employed individuals may access EI benefits. We will also look at the impact on EI for individuals that work for related persons.

SELF-EMPLOYED INDIVIDUALS

Scope

When we talk about self-employed individuals, this may refer to individuals that run their business as:

Type of Benefits

These individuals are not able to access regular EI benefits. However, there is a special EI program designed to assist these individuals if they are unable to work because they are:

  • Pregnant or have recently given birth;

  • Taking care of a newborn or newly adopted child;

  • Unable to work due to medical reasons;

  • Unable to work because they are providing care or support for a critically ill or injured person under 18;

  • Unable to work because they are providing care or support for a critically ill or injured person 18 or over; or

  • Unable to work because they are providing care or support to a person who requires end-of-life care.

Qualification

There are specific conditions for each of the benefits listed above. Additionally, the following conditions must be met:

  • You must be a Canadian citizen or permanent resident;

  • You must be registered in this program for at least 12 months;

  • Your time spent on the business has reduced by at least 40% for at least one week; and

  • You have earned a minimum amount of self-employed earnings between January 1 and December 31 during the year before you apply for benefits.

Registration

Registration can be done online through your My Service Canada Account. Once you are registered, you will begin paying EI premiums.

Other Considerations

If you are an incorporated self-employed individual, you will need to be on salary to access this program as EI premiums are remitted on employment income and not dividends.

RELATED INDIVIDUALS

* The definition of related person can be found in section 251 of the Income Tax Act*

It is not uncommon for business owners to hire their spouses or other family members as employees in the business. Because these individuals are related to the employer, they are deemed to ‘not be dealing at arm’s length’. As a result of this, their employment is generally uninsurable which does not allow them access to EI benefits.

This can cause unintended consequences. For example, if an individual wanted to file a claim during a period of unemployment, they may not qualify. A more common scenario might be an individual trying to access maternity/paternity benefits through the EI program. If their employment was not insurable they would not be able to access these benefits.

If the intention of the parties is to have insurable employment, the following should be considered:

  • Remuneration;

  • Terms and conditions of the employment;

  • Timing or duration of the employment;

  • Nature of work being done by employee; and

  • Importance of the work being done.

When reviewing each of the factors above, the circumstances should be similar to the employment of an ‘arm’s length’ individual. If there is still uncertainty, a ruling can be requested from the Canada Revenue Agency.

Unfortunately, the special EI program discussed above is not available to these individuals. That is only available to the self-employed individuals.

* * * * *

The EI program is a staple of the Canadian economy and plays an important role in improving the standard of living and quality of life for all Canadians. To ensure you or others you know and/or work with/employ can access the EI program when it’s needed most, please speak to a qualified professional.