Digest of Benefit Entitlement Principles Chapter 5 Section 16

5.16.2.1 Operation of a business

Regardless of the nature of the business, once there is a finding that the claimant is engaged in the operation of a business, any moneys arising from that business are earnings to be considered for EI benefit purposes, unless the claimant sells the business or permanently withdraws from its operation.

This is because it is not the mere ownership of a business that leads to a finding of being self-employed; rather it is a decision that the claimant is engaged in the operation of that business which makes the claimant self-employed. There can be no self-employment nor any earnings from self-employment, if a claimant takes no part in the operation of the business or if the activities performed by the claimant are in the nature of exhibiting a natural concern for an investment ^Footnote6 . Taking no part in the operation of a business does not include periods when the business continues to operate and the claimant temporarily ceases taking part in its operation ^Footnote7 . In the case of EI self-employment special benefits, this is particularly the case, where individuals may take a partial or full temporary leave from their business or venture in order to recover from an illness, take time off due to maternity and/or parental responsibilities or require leave to care for a gravely ill family member.

5.16.2.2 Assisting a business enterprise

Claimants may lend a hand in a business owned by someone they know. This does not mean that every claimant who provides some assistance in connection with a business enterprise is necessarily self-employed on their own account or in a partnership or co-adventure, or employed in an employer-employee relationship. The status of the claimant must be assessed in relation to the business to determine whether the claimant is an employee, owner or co-adventurer, or simply someone assisting another.

If a claimant is simply assisting another person, without expectation of any benefit, profit, or financial or economic advantage from the work, either immediate or eventual, and solely because of a friendship or family relationship, then there is neither an employer-employee relationship nor self-employment. If employment of any sort does not exist, there cannot be any earnings as a result of the assistance given. However, if there is any hope or promise of some sort of a financial remuneration in a business, the claimant may not be working totally out of disinterest ^Footnote8 and earnings may be considered for EI benefit purposes. In addition, if no employment exists, then the claimant’s availability status should be explored in connection with the time that the claimant is spending in providing assistance to the business enterprise ^Footnote9 .

5.16.2.3 Working in a corporation in which shares are owned

Being engaged in the operation of a business, which includes operating a corporation, falls into the category of being self-employed. Any income arising from that self-employment is earnings for EI benefit purposes.

Income received from owning shares in a corporation is not treated as earnings for EI benefit purposes if it does not arise out of employment, i.e., if the claimant takes no part in the operation of the corporation ^Footnote10 . However, a claimant who owns shares in a corporation could also work for that corporation as an employee under a contract of service or may be engaged in operating that corporation as a business on their own account or in a co-adventure ^Footnote11 . Some claimants may be paid as employees but also perform some additional functions for which wages or salaries are not paid.

Accordingly, it must be determined when a claimant is receiving any income from a corporation, whether that income is from employment stemming from an employer-employee relationship, from the claimant's self-employment activities in operating a business, or merely from making an investment in that business.

Income from corporations is normally earned through the payment of wages or salaries if the claimant is working for the corporation as an employee. Wages and salary arising out of contracts of employment with corporations are earnings for EI benefit purposes as they arise directly out of employment.

Income may also arise through the payment of dividends, if the claimant owns shares in that corporation. Dividends are paid to shareholders to provide a return on the shareholder's investment in the corporation. Directors of corporations decide if and when dividends are declared in a particular year. Additionally, there may be an increase in the value of the claimant's holdings in the corporation if the net income earned in a period is held by the corporation and not distributed to shareholders as dividends. Determining the claimant's role(s) in the corporation will show what type of income they receive.

As well, employees of a corporation may also be shareholders; that is, they are not benefiting from the corporation’s profit other than by virtue of an investment they have made in order to receive dividends from shares or stock. They hold a position in the organization as do other workers; they are paid wages or salary in return for their work. It cannot be said, therefore, that persons working for a corporation who also happen to hold shares of the same corporation, are self-employed.

The situation is not the same when it is determined that shareholders are engaged in operating a corporation as a business ^Footnote12 . While engaged in operating a corporation as a business, a shareholder may receive wages or salary from the corporation for only a portion of the hours worked or they may not be compensated (as an employee would) for the work at all. Of course, payment for any work performed under a contract of service is earnings from employment. It must be determined whether earnings arise from the work performed without remuneration in operating the corporation.

Although there is no provision in the EI legislation to attribute a value to work performed without wages or salary ^Footnote13 , any income arising out of self-employment is earnings for EI benefit purposes ^Footnote14 .

Claimants who are shareholders engaged in operating a business as a corporation have argued that due to the corporation's status as a separate legal entity, the net income of the corporation belongs to the corporation and cannot be considered earnings of the claimant. However, claimants who are self-employed in operating a business on their own account as a sole proprietor or in a partnership or co-adventure have their share of the income allocated as earnings. If the claimants' share of the income of a corporation was not considered as earnings, it would give an unfair advantage to those who choose to operate their business through the corporate form of business structure over those who do so in a partnership or as a sole proprietorship.

To remove inequities in treatment due to the choice of the structure of a business, the corporate veil is pierced in order to consider earnings arising from self-employment activities of claimants who are engaged in the operation of a corporation. The legal status of the operation or business in which the self-employed person works is irrelevant ^Footnote15 .

When the corporate veil is pierced, the claimant's engagement in the operation of the corporation is examined and any income from that self-employment is treated as earnings. The amount of earnings arising from that self-employment and attributable to the claimant, must be determined.

If there has been a determination that the claimant is self-employed, actually receiving the income is unnecessary, as the mere right to receive such income is sufficient ^Footnote16 . This applies equally to the farming sector, where, through the piercing of the corporate veil, farming transactions and subsidies of the corporation become the transactions and the subsidies of the claimant ^Footnote17 . Therefore, payment does not have to have been already issued for a determination that the moneys are part of the entire income arising out of self-employment. The meaning of income includes income that is received or to be received from an employer or any other person ^Footnote18 .

For those persons who work in self-employment, including farming, the net income from self-employment is the amount remaining after deducting the operating expenses, other than capital expenditures from the gross income from that employment ^Footnote19 . Since the claimant only has a right to his or her share of the net income of a corporation, it is this amount that is determined as earnings for EI benefit purposes when the corporate veil is pierced.

Once it has been determined that the claimant is engaged in self-employment, all income from that self-employment is earnings. There is no provision to attribute only a portion of self-employed income as arising from the investment that the claimant has made in the business ^Footnote20 . This is true whether the claimant is self-employed and operating their business as a sole proprietorship, or through a partnership, co-adventure or corporation.

In a corporate situation, the claimant's portion of the income of the corporation is based on the claimant's investment in the corporation, which is represented by the percentage of shares owned. Piercing the corporate veil may be required to determine the claimant’s share of income.

It is the claimant's share that is earnings and the claimant cannot assign any portion of the income from the self-employment to any other person unless that person has a legal right to claim a share of the income from that business ^Footnote21 . Nor can income be excluded from consideration as earnings because the claimant's share of the net income of the business is left within the business to meet present or future business obligations.

5.16.2.4 The claimant's share of income from self-employment

When the claimant is self-employed in operating a business with others, it is only the claimant's portion of the income from that business that is considered as their earnings. In partnerships, earnings are considered the claimant's share of the income as set out in the partnership agreement ^Footnote22 .

Once there is a finding that the claimant is self-employed, all income arising from that self-employment and its activities must be considered. There is no requirement in law in the determination of earnings to analyse further whether any portion of the self-employment income arose from investment, or the extent of the self-employment itself ^Footnote23 . A portion of the claimant's income from self-employment cannot be excluded from consideration as earnings on the basis that the portion of the income was earned from an investment and not the labour of the claimant ^Footnote24 . However, as already mentioned ^Footnote25 moneys received from investments that do not arise out of the claimant's self-employment activities and meet the criteria for investment income, are not considered to be arising out of employment.

Once it has been determined that the claimant is involved in self-employment, the claimant's share of the income is based on the claimant's entitlement according to ownership or the terms of the partnership agreement regardless of the extent of the claimant's personal involvement, work, or participation ^Footnote26 .

5.16.2.5 Federal or provincial farming income subsidies

A subsidy may be defined as a grant of money made by a government in aid of the promoters of any enterprise, work or improvement in which the government desires to participate, or which is considered a proper subject for government aid, because such purpose is likely to be of benefit to the public ^Footnote27 .

The definition of the word subsidy is so broad that it could include all government moneys paid to farmers with a particular goal in mind. However, it is the moneys or advantages that are earned by labour or resemble them ^Footnote28 that are earnings for EI benefit purposes. Moneys must clearly display the character of a consideration given in return for work done by the recipient ^Footnote29 in order to be considered earnings.

Therefore, all income support subsidies, intended to compensate for lost income, are considered when determining the income of a farmer. Therefore, when considering subsidies for EI benefit purposes, it is the reason for the payment which determines whether or not they are classed as earnings.

An income support subsidy includes any subsidy that pays for differences in the price for which goods are sold and a minimum set price level for the product, that is, a price subsidy, or any subsidy that guarantees the individual's income level, i.e. an income subsidy.

An income support subsidy does not include any course cost subsidies which are designed to increase the knowledge level of the farmer; any subsidy (using the broadest meaning of the word) that pays a farmer "not to farm"; grants received from the government to partly absorb the cost of farming implements; nor any subsidy which is compensating for a decrease in the market value of the land.

5.16.2.6 Advances or draws

Income may be received from customers or clientele as deposits or advance payments on services to be rendered, items to be provided, or sales to be made. These payments are earnings to be considered for EI benefit purposes.

An advance may be defined as money paid before it is due, or a loan. A business operator may receive an advance from the business on the wages or salary that is due to them, or on the business operator's share of the profits. A company may also pay advances based on anticipated sale of products. An advance is a payment for a something before entitlement to that payment is earned, such as, an advance on wages or salary; an advance on commissions before the right to them has occurred; an advance on sales or services before the right to that payment exists under the terms of the sales contract; and an advance taken by business owners on their share of the net income of the business. Advances must be repaid. Normally, the repayment of the advanced amount occurs when the product is sold and the wage, salary, commission or share of the profits is earned and payable. If the right to the expected payment does not occur, the person who receives the advance must still repay it.

The situation is slightly different when an advance against business profits is received. Earnings from self-employment are the amount of the gross income from that employment remaining after deducting the operating expenses. Therefore, the claimant should be declaring earnings as it is earned by the business and not when the claimant is to receive their share of the net income. Rather than considering the advance as part of the gross income of the claimant, the Commision considers the claimant's share of the income that the business earned during the relevant period, whether the claimant receives their share or not ^Footnote30 .

Like a loan or advance, a draw is not part of the claimant's gross income. A draw by a business owner is a lawful withdrawal of an amount from the business against the equity that the business owner holds in the business. Rather than considering the draw as part of the gross income of the claimant, the claimant's share of the income that the business earned during the relevant period is considered, whether the claimant receives their share or not ^Footnote31 .

5.16.3.1 Profits arising from personal land ownership

Land ownership is a personal asset. For example, a person who is self-employed may receive moneys by virtue of ownership of land rather than as a result of their business. Income arising from other sources, such as renting unused land to others, selling mineral rights or receiving royalties from those mineral rights is not income for EI benefit purposes. This income results from land ownership and not from self-employment. As has been previously stated in this Chapter, for earnings to exist, the income must have come from work performed ^Footnote32 .

As well, a person who is self-employed and owns the premises where the self-employment business is located, may rent space on their property to a third party. Likewise, self-employment may be conducted from one’s home where a private basement apartment is located and renders income to the owner. Rental income by virtue of land ownership is not earnings when there is no correlation between the payment of any moneys and employment. This should not be confused with income from rental properties when such rentals are a part of the self-employment activity where the resulting earnings would be income arising out of employment and not ownership.

5.16.3.2 Business or farming loans

Any proceeds received from a business or farming loan are not considered to be part of the entire income arising out of self-employment. A loan is something that must be repaid by the borrower to the person who loaned it and is not considered to be part of income arising from employment.

5.16.3.3 Payments under an insurance policy

Insurance may be defined as a contract whereby, for a stipulated consideration, one party undertakes to compensate the other for loss on a specific subject by specified perils ^Footnote33 . A farmer may purchase insurance against loss or price fluctuations of crops or livestock. A business owner may purchase insurance to protect against financial losses of their product through theft, fire or other damage.

Moneys paid according to the terms of an insurance policy are paid to compensate for the loss of a business asset. As a result, these moneys are not considered to be earnings arising out of employment. In the same fashion, moneys paid under an insurance policy for a loss due to price fluctuations (in the case of farming) are not considered to be earnings arising out of employment. While for the farming sector, federal or provincial governments may assist in the payment of premiums, that does not change the fact that the proceeds paid from an insurance policy are paid solely for that insured loss. Payments from an insurance policy are not in the nature of a grant ^Footnote34 and thus cannot be considered to be a subsidy.

Additionally, the payment of a portion of the premiums by a provincial or federal government cannot be considered to be an income-support subsidy.

5.16.4 Requirement to furnish self-employment financial data

On request from the Commission, the details of a claimant’s self-employed earnings must be substantiated by providing reliable evidence such as financial statements, ledgers and a detailed account of operating expenses ^Footnote35 .

5.16.5.1 Operating expenses

An operating expense is an outflow or other exhaustion of assets or the incurring of liabilities (or some combination) during an accounting period. These expenses occur from delivering or producing goods, rendering services or carrying out other activities that constitute the business entity's ongoing major or central operations. Operating expenses (or revenue expenditures as they are sometimes called) refer to those specific expenses and costs of operating a business that benefit a finite period. Operating expenses are exhausted through the operation of the business to obtain the revenue earned in that period. They are deducted from the income earned over the same period of time that the expenses were incurred ^Footnote37 .

Where business activity varies (for example when periods of concentrated activity with earnings occur then periods of little or no activity without earnings follow) operating expenses may be separated into those operating expenses which are ongoing and those that relate to a particular job. This allows a more accurate match of expenses and revenue.

Ongoing operating expenses represent the cost of doing business and are those expenses which occur on regular basis whether income is generated or not, such as: rent, insurance, wages or salary for regular employees, licenses, property taxes, and utilities. On-going operating expenses are spread evenly over the relevant period of business operation.

Job-specific operating expenses represent the cost associated with a particular activity of the business, that is, a specific product, job, sale, or work performed. Job-specific operating expenses are costs such as: additional wages or salary for employees hired for that work, transportation expenses and materials. Job-specific operating expenses are also applied to the period in which the work is performed. In the weeks where work is performed, there may also be a deduction for ongoing operating expenses (such as salary) as well as the job-specific operating expenses relate to that period (such as specific materials).

Operating expenses vary depending on the type of business and include items, such as: rent, wages, utilities, supplies, bank charges ^Footnote38 and similar day-to-day expenses, as well as property, sales and other taxes paid by the business, advertising expenses, licensing fees, insurance, interest on business loans, maintenance or repair costs, lawyer and accounting fees ^Footnote39 , workers' compensation assessment fees, payroll taxes, and depreciation. Entertainment expenses are also operating expenses where they are required to obtain and maintain clientele or customers.

Operating expenses include only those expenses relating to the business and not expenses incurred for personal or family reasons. Operating expenses may include costs incurred because the business is operated out of the claimant's household; these costs must be demonstrated as additional to the claimant's normal household expenses. For example, if an office, workshop, or storage area related to the claimant's self-employment is maintained in the claimant's residence, deduction for expenses related to that office workshop or storage space may be made. However, a household telephone used for business purposes is an additional expense only if a higher rental rate results from using it for business purposes, or if there are long-distance or toll calls attributable to the business.

In a partnership, operating expenses may vary and are not necessarily split evenly between the partners. The percentage is based on the partnership agreement where one partner has removed themselves from the business for a temporary period of time and an operating expense is incurred by hiring a replacement worker, only a percentage of that expense may be deducted from that partner’s earnings. For example, if there are two equal partners, 50 per cent of the cost of the replacement worker’s wage may be deducted as an operating expense for the partner who is temporarily away from work. The cost of the replacement worker is an expense of the business not the individual they are replacing.

5.16.5.2 Capital expenditures

Capital expenditures (or balance sheet expenditures) are spent to acquire or to improve assets. The assets benefit the business entity over one or more accounting reporting periods beyond the period of acquisition or improvement. An accounting reporting period is usually one year. The asset is used, or will be used, to earn not only revenue in the current reporting period, but also revenue in future reporting periods. Capital expenditures are items such as the purchase of land, buildings, equipment such as computers and vehicles, the repayment of the principal amount on a loan, and the cost to purchase a franchise.

The cost for the purchase or improvement of assets, that is, a capital expenditure, is not an operating expense. As a result, the total cost for the purchase or improvement of assets cannot be deducted from gross income when determining earnings for EI benefit purposes. To allow a deduction of the entire cost of an asset from the income for a specific period when the asset will be used beyond that period would distort the match of revenue and expenses and result in an erroneous picture of the earnings gained for that period. It is for this reason that the only deductions to be made from the gross income are for operating expenses.

Capital expenditures made for assets having limited lives, such as equipment and buildings, do have an operating expense associated with them. Through use of an operating expense, the cost of the capital expenditure is spread out over the estimated useful life of the asset. In this way, the cost to acquire and maintain an asset used in operating a business can be assigned throughout the entire useful life of the asset. The operating expense most often associated with fixed assets is that of depreciation.

Depreciation expenses or costs arise from capital expenditure outlays such as buildings and equipment and represent the loss or reduction in value over their lifetime. Vehicle depreciation is a common expense of this nature. As long as the method chosen to calculate the depreciation is credible and reasonable, it is accepted as operating expenses.

The purchase of inventory is a capital expenditure and not an operating expense ^Footnote40 . However, as the inventory items are sold, the purchase price of the item sold may be deducted from the sales revenue, as may the purchase price of any item lost, stolen, damaged or destroyed.

5.16.7.1 Allocation of earnings arising from the performance of service(s)

The earnings of a self-employed claimant which arise from the performance of services, either by the claimant or someone else, are allocated equally to the specific week or weeks in which the services are performed. This includes earnings received from profits or commissions where services were performed to earn those earnings ^Footnote52 .

5.16.8.1 What is a transaction

A transaction is a business deal or a sale that arises from the activities of self-employment. A transaction includes the sale of many types of goods and products, including farming products (crops, wood, livestock, eggs, grains, honey, fruits, vegetables, flowers, tobacco, etc.), products built from hand (art, furniture, housing, clothing) but also can stem from services that perhaps do not fall as cleanly into this category as those products mentioned. For example, real estate commission earnings resulting from the sale of a home are transactional-based where, if not for the sale of the home, the earnings would not have been received. Thus, it is the transaction of purchase and sale that is considered earnings for EI benefit purposes.

A sales contract is an agreement under which the seller agrees to convey title to property upon payment by a buyer under terms of the contract. This conveyance constitutes a transaction. It includes both a present sale of goods and a contract to sell goods at a future time. Self-employed persons who are engaged in selling goods or products are contracting with their customers for a product. As a result, the income is generated by a transaction.

5.16.8.2 Determining when a transaction occurs

A transaction occurs when a sale is considered complete, that is, when the buyer purchases the product and a right to payment for that product exists. It does not matter whether the payment for the transaction is immediate or deferred. This applies to all transactions arising from self-employment, including farming transactions.

It is the terms of the sales contract that determines when ownership is transferred and the sales transaction is complete. A transaction may occur on payment of a deposit or the full price for the item, or only upon delivery of the product to the customer. A transaction also occurs when a customer who backs out of a deal forfeits a deposit.

A transaction occurs when a claimant delivers a product and receives a payment ^Footnote53 that is immediately negotiable. A transaction also occurs in the week that delivery is made where the claimant agrees to defer payment for the product to a later date. Even if a payment is deferred, the product is still considered as sold and the transaction complete as the product no longer belongs to the claimant.

Deliveries made to a company, marketing-type board or agency may result in a set price for the product delivered. If the final price obtained for this product is greater than the initial price paid by the board or agency, the claimant receives the difference. In this circumstance, the transaction occurs when the initial sale or delivery is made. Any subsequent payment based on the difference in price is considered a transaction in the week that the original delivery was made and the product purchased by the marketing board.

A transaction does not occur when a person delivers a product to a company, board, or agency for later sale when market conditions are most favourable. It is not considered to be a sale or a transaction if the item is just delivered to a company, marketing board or storage agency, and no payment for the product is received, and a receipt or a storage ticket ^Footnote54 is issued.

A transaction does not occur if a claimant holds products awaiting a more favourable price or delivers products for later sale and receives an advance ^Footnote55 against the amount to be received when the products are finally sold. This advance cannot be called a transaction as no sale or purchase has occurred and may never occur. This type of payment is in the nature of a loan that the claimant must repay using the sale of the product when it is finally sold. A loan that is received by a claimant is not earnings for EI benefit purposes as it is not income arising out of employment. A loan must be repaid. However, a transaction occurs in the week of the sale of the product if and when that sale ever occurs.

If the claimant receives payment from a company, marketing board or agency representing an estimate of the amount of their products sold over a specific period, and if the exact dates of the sales are not available or cannot be reasonably ascertained, the transaction may be considered to occur when the payment is made.

5.16.8.3 Allocation of earnings arising from a transaction

Earnings arising from a transaction, including those earnings that are from profits or commissions, which exceed the maximum yearly insurable earnings divided by 52 in effect at the time of the transaction, are allocated to the specific weeks where the work was performed which resulted in the transaction ^Footnote56 , in a manner that is proportional to the amount of work that was performed during each of those weeks.

Where earnings stemming from a transaction are less than or equal to the maximum yearly insurable earnings divided by 52 in effect at the time of the transaction ^Footnote57 , they are allocated to the week in which the transaction occurred. If the claimant indicates, however, that the work which gave rise to the transaction was performed in more than one week, then those earnings are allocated to the specific weeks where the work was performed in a manner that is proportional to the amount of work that was performed during each of those weeks.

It is important to note that although the legislation delineates between farming transactions and non-farming transactions ^Footnote58 , the allocation of earnings stemming from all transactions (from farming or not) is the same, with the exception of farming subsidies which are always allocated to the week in which the subsidy was paid ^Footnote59 .

If no work was performed, then the earnings are allocated to the week of the transaction.

[ December 2011 ]

5.16.8.4 Proportional allocation of transactional earnings

The Regulations dictate that transactional earnings are allocated to the weeks in which the work that gave rise to the transaction was performed, in a manner that is proportional to the amount of work that was performed during each of those weeks. They are to be allocated in such a way as to accurately and fairly reflect the work performed ^Footnote60 . Accordingly, in situations where the work was performed over a period which includes partial weeks then the earnings are to be allocated proportionally ^Footnote61 .

[ December 2011 ]