As a Canadian small business owner, managing payroll compliances may seem straightforward and cost-effective, especially if you’re the only employee. However, the complexities, particularly with Employment Insurance (EI) exemptions, can sometimes lead to costly errors.

The Scenario

Imagine you’ve been meticulously handling your payroll, only to realize that you’ve mistakenly remitted EI premiums despite being exempt.

Understanding the EI Exemption

Canadian tax laws stipulate that participation in the EI program is voluntary for self-employed individuals. You qualify for this exemption if:

  • You do not work as a barber, hairdresser, fisher, taxi driver, or operator of other passenger vehicles.
  • You are a Canadian citizen or permanent resident.
  • You operate your own business or control over 40% of the voting shares in a corporation.

If you fall into one of the exempt professions mentioned above, you do not need to register for the self-employed EI program and should apply for EI benefits as an employee instead. 

EXTRA Note: Note that those related to you (spouse, child etc are also EI exempt – more on this here: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/employment-insurance-ei/hiring-a-family-member-a-related-person.html  

The Consequences of Incorrect EI Contributions

Incorrectly remitting EI premiums can lead to substantial financial losses. As a business owner, you’ve been paying both the employee and employer portions of EI, despite being ineligible. Over time, this error can result in significant accumulated costs, particularly if it continues for several years.

Corrective Steps

To rectify this issue promptly, follow these steps:

  1. Complete Form T2204: Begin by filling out Form T2204, Employee Overpayment of Employment Insurance Premiums, to report the overpayment to the CRA.
  2. Provide Proof of Share Ownership: You may need to present your central securities register as evidence of your share ownership, demonstrating that you control over 40% of the voting shares, thus qualifying for the EI exemption.
  3. Update Payroll Settings: Adjust your current payroll settings to reflect your EI exemption. Coordinate with your payroll software provider to allocate the employee portions paid to taxes and credit the employer portions to your account.
  4. Communicate with CRA: Once the CRA processes Form T2204, inform them that the issue has been rectified for the current payroll year. For previous payroll years, confirm that no amounts have been refunded to the employee. The CRA will issue an amended T4 to your employee, allowing them to reclaim those premiums. 
  5. Request Refund or Credit: After the CRA approves the T2204 form, they will credit your current year account for the overpayment of EI in previous years. You can also request a refund of these amounts from the CRA agent. 

Conclusion

While managing your own payroll might seem straightforward, it’s imperative to be well-versed in specific exemptions and regulations. By understanding the EI exemption for self-employed individuals and swiftly addressing any errors, you can prevent costly mistakes and maintain compliance with CRA guidelines.

For comprehensive instructions and access to Form T2204, visit the CRA website here.

If you require further assistance, consult a qualified accountant to ensure your payroll is accurately managed, allowing you to concentrate on growing your business without financial uncertainties.

Disclaimer: This blog is provided by Virtual Heights Accounting, a CPA and bookkeeping firm in Canada, for informational purposes only. It does not constitute financial, tax, or legal advice. For personalized advice, consult a qualified professional.