Non-arm’s length employment (EI)

A buyer may meet this when a main-street business is staffed by the owner’s relatives, or when the buyer plans to hire family. Whether premiums should have been deducted, and whether an employee can claim EI later, can turn on this rule.

How the Act and CRA treat it

Paragraph 5(2)(i) of the Employment Insurance Act excludes from insurable employment employment if the employer and employee are not dealing with each other at arm’s length. Under paragraph 5(3)(a), whether they are is determined in accordance with the Income Tax Act. CRA says employees are related to their employer if related by marriage (including common-law partnership), adoption or blood, or, where the employer is a corporation, if related to a person who controls it or is a member of a related group that controls it, and that related persons are deemed not to deal at arm’s length. Under paragraph 5(3)(b), a related employer and employee are deemed to deal at arm’s length 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 they would have entered into a substantially similar contract of employment if they had been dealing at arm’s length. CRA adds that the Canada Pension Plan does not have provisions regarding non-arm’s length employment relationships.

What to ask

• Which employees are related to the owner or to a controlling shareholder
• Whether EI premiums were deducted for them, and whether a CPP/EI ruling exists
• Whether their pay and duties match what an unrelated employee would get

See employment red flags when buying a business and insurable employment.