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Maternity benefits for commission-based workers

Expert: Gord McFee, Jacqueline F. Couture & Julie King

Gwen asked:

I live in B.C. and I am considering leaving my salaried positon for a commissioned position but I want to have a family in the future and I don't know if a commissioned based job will offer maternity benefits.

Gord McFee, Jacqueline F. Couture & Julie King answered:

To answer your question CanadaOne's co-founder and managing editor, Julie King, spoke to both Gord McFee, Director General of Entitlement, Appeals and Quality at Human Resources and Social Development Canada (HRSDC) and Jacqueline F. Couture, Assistant Director of Operations, Media Relations and Media Monitoring for Canada Revenue Agency (CRA).

Based on her research Julie King prepared the following answer:

The first thing to consider is whether you will be working as a commission-based employee or as a self-employed individual that invoices the company.

If you will be working as an employee of the company then you will qualify for EI benefits including the maternity benefit as long as you meet HRSDC's requirements (e.g. number of hours worked, etceteras). Gord McFee, Director General of Entitlement, Appeals and Quality at HRSDC, explained that when someone works on a commission basis, the employer and claimant agree on the hours worked and that is used to calculate the eligibility of the claimant.

This is not the case, however, if you will be self-employed in your new position.

Jacqueline F. Couture, Assistant Director of Operations, Media Relations and Media Monitoring for Canada Revenue Agency (CRA) explained that people who are employees of their own company are not considered to be engaged in "insurable employment".

She noted that "(A) If it is determined that a person is engaged in insurable employment they would then receive EI benefits (assuming they meet the qualifying conditions as determined by HRSDC/Service Canada). "Employees" are normally engaged in insurable employment, however, employees of their own companies are not considered to be engaged in insurable employment if they control more than 40% of the voting shares of the corporation (as per paragraph 5(2)(b) of the EI Act)."

"If she is not a shareholder but considered to be at non arm's length with the corporation for which she works, the terms and conditions of the employment would have to be examined to determine whether or not they were reasonable", said Jaqueline. "If the terms were not reasonable, the employment would not be insurable this is per paragraph 5(2)(i) EI Act."

So the simple answer is that if you were to work as a self-employed individual then no, you would not qualify for maternity benefits.

However, you will notice that Jacqueline mentions that the legislation applies to people who "... control more than 40% of the voting shares of the corporation" (tax legislation may indicate that owning less than 50% of the voting shares as opposed to 40% or less may be sufficient; check with a tax specialist for information on the latest rulings). This creates an opportunity for you to have access to the same benefits as a woman employed in standard employment.

If your new employer would prefer to have you invoice his or her firm as a self-employed contractor then you may wish to set-up an incorporated company where you are not the majority shareholder. For example, you may wish to have your spouse control 60% of the voting shares in the incorporated company.

Handing over control, however, is not enough for you to qualify for EI benefits. Since you have what is known as a "non arm's length" relationship with the person who controls the majority of the voting shares, you would also need to demonstrate that you are treated the same as an "arm's length" employee would be.

Gord McFee explained that when a claim is received where there is not an "arm's length" relationship between the employer and employee the validity of the contract is looked at by HRSDC. Essentially, they look to see whether or not the employee is treated the same as other "arm's length" employees. For example, are they paid the same wages, expected to do the same duties and work similar hours, etceteras? The vast majority of cases that are reviewed are never sent on to CRA for a tax ruling because the employment contract is deemed to meet the same standard as "arm's length" employees.

Gord explained that the incorporated business cannot just be a "paper" company that was created to qualify the employee for EI benefits. Not only would this not qualify, but if it was determined that the company was set-up for this reason then both the employer and employee could face fraud charges.

However, since in your case the company would have valid operations, with profits and expenses, then you should be able to qualify for maternity benefits as long as your employment contract met the criteria specified by HRSDC. In this case you would likely pay yourself an industry-standard salary for the duties performed while any extra profits from the corporation could be paid out as recommended by your accountant. (As a side note, incorporating offers other advantages as well. Getting assistance from an accountant who specializes in tax law if you decide to proceed with the incorporation would be worth considering.)

To summarize, it is possible for self-employed women to qualify for maternity benefits if they carefully establish the business, work the appropriate number of hours and are in compliance with HRSDC's "arm's length" test.

I realize this is not a simple answer, because of the drastic changes to the nature of employment that we have seen since the early 1990's.

Gord McFee explained that the EI rules were initially set in the 1940's and then were updated in 1971 after women advocated for things like maternity benefits. We have seen significant changes to the nature of self-employment since that time, yet the legislation governing EI benefits has not changed.

This is of particular concern as many women are now finding that self-employment is the most accessible - and in some cases the only - form of employment available to them. It is not uncommon for corporations to shift their workforce from full-time employees to self-employed contract workers, leaving female contract workers with limited options should they decide to start a family.

It is also quite offensive that a working woman in the year 2006 would need to hand off control of her business to her spouse or another person in order to qualify for benefits that many Canadian women qualify for automatically.

There must be better options that would balance the need for fairness and accountability while still allowing women to own and control their own companies. In fact, a reasonable solution has already been reached for business owners who work for their own company and apply for the Scientific Research and Experimental Development (SR&ED) Tax Credits, a program that will reimburse companies for up to 30% of the cost of their R&D expenses.

It seems that the time has come for a policy review by stakeholders and the federal government to determine whether or not self-employed women should have access to special benefits like maternity or parental benefits. While changing the legislation is not something simple that can be done quickly, it is probably important enough to make this a priority.

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