# CPP For Non-Arms-Length Employees



## Barwelle (Feb 23, 2011)

_deleted_


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## domelight (Oct 12, 2012)

Barwelle said:


> Situation has arisen regarding payment I received for work I did for the family business; would appreciate input anyone may have. I'll try to keep it as simple as possible.
> 
> Last year, CRA ruled that I am an employee for the family farm (wholly owned by my parents) but because of my non-arms-length relationship, it is uninsurable... so, I do not pay EI, which is fine. But I do have to pay CPP.
> 
> ...



Long and short is you should likely be on payroll. What your talking about is very common in farming and was common for corporate mgmt fee's. CRA put together a project at the end of 2008 and made it clear that this was not going to be accepted going forward.

For now you can do one of two thing's you can either contact payroll and open an account and deal with the penalties which will result by trying to issue a T4 for 2012 which will now be late. or you can report the income on line 168 (farming income) you should be able to just enter your SIN # in lieu of a business number. This will calculate the CPP correctly. Do not report the income on line 104 this will not calculate any CPP and is a red flag with CRA and you will likely be questioned.

Going forward you will need to determine the treatment on the income drawn from the farm if you are simply being paid by the hour then a T4 should apply. In order for the T4A to be legitimate and accepted by CRA you will need to demonstrate some basis for the commission. for example a percentage of the commodity or livestock sold. The percentage must be fixed and consistent.


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## OptsyEagle (Nov 29, 2009)

Barwelle said:


> Last year, CRA ruled that I am an employee for the family farm (wholly owned by my parents) but because of my non-arms-length relationship, it is uninsurable... so, I do not pay EI, which is fine. But I do have to pay CPP.


How many times does your father think these people are going to warn him? Does he really want to find out how the next warning is going to come to him and what it will feel like?

He should set up a remittance account with CRA. It is easy. Here is where to start. 

https://apps.cra-arc.gc.ca/ebci/rhpd/startLanguage.do?lang=English

He needs to pay the employers part of CPP. He can not like that all he likes. No one else likes it either. Now when he sets this up for 2012 and makes his MANDATORY payments, he will now be charged interest, because of late payment. Tell him to expect this. He is dealing with the government here and he doesn't get to make up the rules. Once he has made his remittances, he can issue you a T4 as the employee you were.

Keep in mind, however, that part of the remittances will be your share of withholding taxes and CPP. He most likely will want that back from you if he did not withhold it already. Of course they will want the employers share of the CPP as well. That is and always has been his responsibility. Most employers just take this into account and reduce the employees pay accordingly unless they are up against minimum wage where they either just pay it or as many do in our country, go out of business or move the operation overseas. LOL. All hail the minimum wage.


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## Charlie (May 20, 2011)

if CRA has ruled you're an employee I think your dad's business is pretty much stuck. They will assess on that basis, and expect T4's with the employer portion paid by the employer. 

With the self employed commissions T4A you would report as self employed and pay both portions of CPP-- but that's in no way addressing CRA's ruling -- which was employee. So you can report that way if you choose -- no risk to you as long as you're willing to pay both sides of CPP -- but your dad's business is likely to get hit with a reassess and penalties. They've already been flagged. When (not if) that happens, you'll get an amended T4, will amend your T1 and get back the employer portion of CPP.

Your dad's the one at risk here. And since they've already issued their ruling it's a pretty huge risk.

----and even if it's commission, your dad's required to withhold CPP and remit if you're an employee. Only diff would be that you could deduct commission expenses. The way they've reported it, they're treating you as self employed.


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## OptsyEagle (Nov 29, 2009)

The only legit way for you to pay the employer's CPP is to pay it to your father and have him remit it to CRA under his business number. If he doesn't have a number these are easy to get. Just search around the link I gave you. That is the way it is done. 

If CRA created a way for employees to pay that amount directly, you can be sure more then one employer would start forcing all their employees to do that. That is why they have set up their rules the way they are. They will enforce them.

You do not need an accountant to set you up as an employee. You already are an employee. All you need to do is use that link I provided to determine the applicable withholding amounts and have your employer remit them to CRA directly. At the end of the year your employer will submit a very, very simple statement (return) that outlines who the remittances were for. At the same time he will submit a copy of all T4s with it. He will give you a copy of your T4, as well.

If you plan to come up with another scheme to organize you as a self-employed contractor, I would also suggest that your father fill out seperation slips to officially release you from your employment status. If not, CRA may feel that you are just doing this to skirt around their rules. In your case, I doubt they will get too upset because all taxes and CPP will inevitably get paid, no matter how you classify yourself, but that is the proper procedure to follow, in my opinion.

It's simple. Not as simple as ignoring it, but pretty simple.


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## MoneyGal (Apr 24, 2009)

OptsyEagle said:


> The only legit way for you to pay the employer's CPP is to pay it to your father and have him remit it to CRA under his business number. If he doesn't have a number these are easy to get. Just search around the link I gave you. That is the way it is done.
> 
> If CRA created a way for employees to pay that amount directly, you can be sure more then one employer would start forcing all their employees to do that. That is why they have set up their rules the way they are. They will enforce them.
> 
> ...


This whole post is great and I have one comment on the above point: if you don't even have a written agreement w/r/t duties and compensation, the likelihood of this plan -- coupled with the pre-existing ruling -- succeeding is very small.


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## domelight (Oct 12, 2012)

domelight... you touched on an interesting idea. See, my pay isn't based on an hourly wage or salary or anything. Really, it's just an arbitrary number decided at the end of the year, based on how much I contributed generally to operations, and how well the farm did. So maybe for next time we should come up with an actual commission rate or something and go by that. Or, something we've discussed is becoming a part owner of the business so that any money I recieve from the farm would be considered dividends.[/QUOTE]

Barwell,

What I'm sugesting is a legitimate tax stradegy, however I agree with MoneyGirl that a written agreement should be put in place. That being said as long as there is a basis for the income share and the percentage is consistent it will work as self employeed vs. a T4. (I have been able to justify this stradegy under audit) Their would be legitimate reasons to increase it or decrease it from year to year but everything needs to be done correctly. (The planning can't be retroactive)

With regards to bringing you into the company (I'm assuming you are incorporated because you said dividends) Thats a whole large can of worms to open. Here are some major considerations.

1. Farm shares could be transferred generationally from ACB anywhere upto FMV. Capital Gains Exemption ??
2. Estate Freeze. Protect dads Equity ??
3. Whats dad's comfort level at bringing you into the corp, all at once over time.There could be a significant stratedgy to bring you into the company over time.
4. Are there other children which need to be treated equally ??
5. Once you become a share holder you will probably not have a share holder loan so you will draw into a negative and determine the tax treatment at year end.
-if you draw inconsistent amounts and declare a 1% taxable benefit this is ok.
-if you draw a flat $ 3,000/mth or $ 900/week for example this will be ruled as payroll.
6. Dividends don't contribut to CPP. Is this a concern for you ???
7. Payroll may actually put more money in your pocket if you have children Child tax benefits ??
8. Do you have medical expense ?? Dividends may be better but you should issue a $ 3,500 T4 anyway if you can qualify for refundable medical supplement or Working income tax benefit. (You would have to draw a minimal amount from the company to make this effective but there is a basis for for a short term stradegy)


The list goes on. Find an accountant that truly understands farm sucession. A good one won't be cheap.

Good Luck.


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## MoneyGal (Apr 24, 2009)

domelight said:


> What I'm sugesting is a legitimate tax stradegy, however I agree with MoneyGirl that a written agreement should be put in place. That being said as long as there is a basis for the income share and the percentage is consistent it will work as self employeed vs. a T4. (I have been able to justify this stradegy under audit) Their would be legitimate reasons to increase it or decrease it from year to year but everything needs to be done correctly. * (The planning can't be retroactive)*


Just coming back to this, because I've been thinking about it - right now, CRA is doing your tax planning for you. 

Domelight is suggesting a much bigger-picture view for you than the issue of salary/employee/contractor/owner/dividends - up to and including succession. It's probably worth taking the opportunity the CRA ruling provides to do some thinking about what your family's options are for addressing the ownership and role of the farm across the family.


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## OhGreatGuru (May 24, 2009)

CRA has already ruled you are an employee. The unwillingness of your father (and his accountant) to accept this are the problem. Whether or not you are willing to pay your employer's share of the CPP is non-germane. Your employer has to register and cough it up.

If both of you feel you have grounds to disagree with CRA's ruling, then file an appeal to try to get the ruling changed.


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## domelight (Oct 12, 2012)

Barwelle said:


> We're going to get a T4 made up, I guess he'll have some penalties to pay. I'm really curious why the accountant figured it could be considered pension income... anyways, thank you everyone for your input.
> 
> Domelight, those were all very good points. We have had some discussions about farm succession, and went to a presentation, but no steps have been taken yet. Dad's still in the game for a while so there is no rush but it is a complex issue so it's always in the back of my mind that we should be doing more.
> 
> It sounds like you have some experience in this?


 I could probably steer you in the right direction. I'm not really on this forum to drum up business but contact me if you like. [email protected]


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