Principal Issues: Whether a 40% shareholder of a corporation which is an employee of a partnership in which the corporation is a partner has an insurable employment for the purposes of the EIA where the other partner of the partnership is another corporation 40% of the shares of which are held by another person?
Position: no
Reasons: see below
APFF FEDERAL TAX ROUNDTABLE 11 OCTOBER 2013
APFF CONFERENCE 2013
Question 23
Plurality of partners in a partnership and employment insurance
The Employment Insurance Act ("EIA") provides in paragraph 5(2)(b) that insurable employment does not include:
“the employment of a person by a corporation if the person controls more than 40% of the voting shares of the corporation.”
For example, a sole shareholder of a corporation that receives salary as an employee of that corporation is not required to make employment insurance contributions.
In a given situation, two corporations are partners of a partnership ("S.E.N.C."). The shares of each of the two corporations are held respectively by a sole shareholder. The S.E.N.C. pays salaries directly to each of these sole shareholders.
It is recognized that S.E.N.C. are commercial entities. However, it is also recognized that they are not a person within the meaning of the definition of "employer" in the EIA (footnote 1). Consequently, the partners are legally responsible for all matters affecting the business and these are the same partners of the S.E.N.C. who are bound by the obligations of "employer".
We thus understand that in case of plurality of partners, these are all employers of the employee(s). This conclusion leads to significant technical problems, since, for example, in the given situation, it is clear that sole shareholders each hold more than 40% of the controlling shares of their employers, being their corporations, and are therefore exempt from employment insurance premiums in this regard. However, they are also employed by all other partners of the S.E.N.C. As a result, each sole shareholder is also an employee of the corporation of the other sole shareholder and vice versa.
Question to the CRA
Would the CRA be willing to take a final position to clarify the obligation to make employment insurance contributions in the event that an S.E.N.C. owned by a plurality of partners pays salaries directly to the shareholders of the corporate partners?
CRA response
Under paragraph 5(2)(b) of the EIA, a taxpayer does not hold insurable employment with a corporation if the taxpayer controls more than 40% of the voting shares of that corporation, so that the employer does not have to make the contributions required for the purposes of the EIA.
The CRA is of the view that, in a situation such as the one you submitted to us, employment with the S.E.N.C. is employment with its partners. Thus, no EI premium would be required in respect of the employment of the taxpayer controlling more than 40% of the voting shares of the corporation, which is a partner of the partnership.
Hugo Gravel
957-8981
2013-049591
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Tavares v. M.N.R., [1999] A.C.I. No. 135 and International Minerals & Chemical (Canada) Global Limited v. M.N.R. [2001] 678 (TCC)