Insurable Employment: Related Individual

Posted on March 24th, 2025 in Domestic Tax

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A September 6, 2024, Tax Court of Canada case reviewed whether a taxpayer’s employment by a corporation owned by her brother was insurable. The taxpayer performed various office duties for the corporation.

As the taxpayer was related to the corporation, she was non-arm’s length to the employer. A nonarm’s length employee is engaged in insurable employment if it is reasonable to conclude that they would have entered into a substantially similar employment contract with an arm’s length person. Some aspects commonly relevant to such determinations are remuneration paid, duration of work performed, nature and importance of work and, terms and conditions of employment.

Earnings not insurable

The Court stated that the taxpayer’s evidence was not credible and concluded that her employment was discretionary (that is not substantially similar to a contract with an arm’s length person) and not insurable, supported by the following facts:

at various times, the taxpayer indicated that she was paid based on salary, hourly wages or both at the same time;
the taxpayer was unable to explain how the insurable earnings reported on her Records of Employment were computed, and they were not consistent with her testimony on how her compensation was determined;
the evidence provided indicated that her employment was sporadic, with layoffs at various times of the year (in a period of just over five years, the taxpayer was laid off at least once during each calendar month); and
the taxpayer’s vacation in each year varied from 2 to 33 weeks.

The Court concluded that similar terms would not have been available to an arm’s length employee, so the employment was not insurable.

As the earnings were not insurable, the employee and employer would not be responsible for EI premiums; however, the employee would not be eligible to receive EI benefits (such as sickness benefits, caregiving benefits, maternity or parental benefits, or regular benefits).

If an employee is a relative of the business owner, confirm whether their income is insurable or not, as this affects EI premiums and benefit eligibility.

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Article originally published in: Tax Tips & Traps 2025 First Quarter – Issue 149.