CPP and EI for owners and family members: when they're exempt

Sole proprietors and partners

If you run your business as a sole proprietor or a partnership, you are not an employee of your own business. What you take out is a draw, not a paycheque, so no CPP, EI or tax is deducted at source. You pay both halves of CPP on your self-employment income through your personal tax return, and EI only if you opt in to the special benefits program for the self-employed. See owner draws vs contributions.

The rest of this article is about people who are on payroll: owner-managers of a corporation, and family members you employ.

Shareholders who control more than 40%

Under the Employment Insurance Act, employment by a corporation is not insurable if the employee controls more than 40% of the corporation's voting shares. The CRA's own example: two siblings who each own 50% of a garage company are not insured, because each controls more than 40%.

So an owner-manager who pays themselves a salary from their corporation usually has no EI deducted and no employer EI to pay. They can register for EI special benefits (maternity, parental, sickness, caregiving) as a self-employed person if they want that coverage.

CPP is different: a controlling shareholder paid a salary is still in pensionable employment, so CPP is deducted and the corporation pays the employer share. Dividends aren't pensionable earnings, which is one reason owners weigh salary against dividends; that's a question for your accountant.

The CRA treats an employer and employee who are related as not dealing at arm's length, and that employment may not be insurable for EI. Related means:

By blood: a parent and child (or grandchild and so on), or brothers and sisters. Aunts, uncles, nieces, nephews and cousins are not related for this purpose.
By marriage or common-law partnership: spouses, and common-law partners after 12 months living together or sooner if they have a child together.
By adoption, including adoption in fact.
A corporation is related to a person who is related to whoever controls it.

The employment can still be insurable if it's reasonable to conclude you would have hired an unrelated person on substantially similar terms. The CRA looks at the whole picture:

Pay: is it in line with what you'd pay a stranger for that work?
Terms and conditions: hours, duties, supervision, time off.
Duration: is the job tied to real business needs, or does it start and stop to fit EI claims?
Nature and importance of the work: would you need to hire someone if the relative didn't do it?

A daughter who works the counter 30 hours a week at the going rate, with the same schedule and duties as the other staff, may well be insurable. A spouse paid well above market for loosely defined work probably isn't. Many family employees fall in between, which is what rulings are for.

CPP usually still applies

Being related doesn't change CPP. You deduct CPP from a family member's pay as for anyone else, with one exception: a spouse or common-law partner whose pay you can't deduct as a business expense for income tax. Income tax is deducted from every employee, related or not.

The usual age rules still apply: CPP starts the month after the employee turns 18 and stops after the month they turn 70, and an employee aged 65 to 69 who receives a CPP or QPP retirement pension can stop contributing by giving you Form CPT30. Quebec employees contribute to the QPP under Revenu Québec's rules.

Showing it on the T4

Box 28 has the exemption boxes: CPP/QPP, EI and (for Quebec) PPIP. Mark EI for an employee whose employment isn't insurable.
Box 24 (EI insurable earnings) stays blank or zero when EI doesn't apply all year.
Box 26 (CPP/QPP pensionable earnings) is filled in when CPP applies, and box 16 shows the contributions.
Box 14 still shows all employment income.

If you deducted EI from someone who turns out not to be insurable, or didn't deduct it from someone who is, sort it out with the CRA before you file the T4s. Our T4 deadlines guide has the filing dates.

When you're not sure

Either you or the worker can ask the CRA for a CPP/EI ruling on whether the employment is pensionable and insurable. It's free, and it settles the question before premiums pile up on the wrong side. Do it when you first hire a relative on payroll, or when their role changes.

Setting it up in AcboBooks

Each Canadian employee in AcboBooks has two checkboxes: CPP/QPP exempt (under 18, over 70, or CPT30 filed) and EI exempt (e.g. controlling shareholder). Tick EI exempt for an owner with more than 40% of the voting shares, or a related employee whose job isn't insurable, and paycheques stop calculating employee and employer EI. On the T4 report, that employee's insurable earnings (box 24) are zero, and the T4 XML file you upload to the CRA marks the exemption in box 28. CPP/QPP exempt works the same way for box 26.

The boxes apply to every cheque from the time you tick them, so set them before the first pay, and change them at the right pay when someone turns 18 or 70 or hands you a CPT30.

Frequently asked questions

Do I deduct EI from my spouse's pay?

Not automatically. Employment between related people is not insurable unless it's reasonable to conclude that you'd have offered an unrelated person a substantially similar job on the same terms. If it is arm's length in substance, EI applies.

Does an owner who controls more than 40% of the shares pay EI?

No. Employment by a corporation is not insurable if the person controls more than 40% of its voting shares. They can register separately for EI special benefits for the self-employed.

Is CPP deducted from family members?

Generally yes. The exception is a spouse or common-law partner whose pay you can't deduct as an expense for income tax.

What do I put in box 28 of the T4?

Tick the EI exemption in box 28 for an employee whose employment isn't insurable, and the CPP/QPP exemption for one who isn't in pensionable employment. Leave boxes 24 and 26 blank for an exemption that applies all year.

This article is general information, not tax, legal or accounting advice. Rules and dates change; check the official source or ask your accountant before acting.