Digest of Benefit Entitlement Principles Chapter 5 - Section 16
5.16.0 Earnings from self-employment
For EI benefit purposes, earnings are income earned by labour or resemble income earned by labour (FCA A-136-96, CUB 31814). As a result, earnings must arise from some type of employment. Included in the meaning of employment is self-employment (EI Regulation 35(1)(b)).
Self-employment may be defined as being engaged in labour or work on one's own behalf, rather than being employed by someone else under a contract of service. Self-employment includes situations where a claimant works alone as an independent worker or contractor, as well as those situations where the claimant engages in a business activity on their own behalf or is engaged in the operation of a business as a partnership or co-adventure. Self-employment also includes being engaged in the operation of a business as a corporation (EI Regulation 30(5)). Self-employment involves working and striving to achieve a profitable financial enterprise. The efforts of the self-employed person are part of what makes a business run.
People who are not engaged in self-employment, but have only invested in a business, expect profits through the efforts of the people who are running the business, such as a business operator, promoter or a third party who is acting on the owner's behalf. Generally, those not engaged in self-employment benefit from the results of the business operation through ownership and not through labour, work or effort on their part in achieving those results.
For self-employment to exist, there must be involvement in activities which are designed to generate income from providing a product or offering a service or involvement in the managing of those individuals who attempt to generate income. As long as there is a finding that the claimant is engaged in the operation of a business, there is participation, labour or work by the claimant and moneys resulting from that self-employment are earnings for EI benefit purposes (EI Regulation 35(2)).
5.16.2 Determination of earnings from self-employment
Once there has been a determination that the claimant is self-employed, then the claimant's share of all income from that self-employment is considered to be earnings (EI Regulation 35(2)), and may affect benefits payable. That is whether or not those earnings arise from the work of the claimant or from the work of others on their behalf. This does not include pure investment income.
18.104.22.168 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 (Digest 22.214.171.124). 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 (Digest 4.6.10, Digest 24). 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.
126.96.36.199 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 and earnings may be considered for EI benefit purposes (Digest 4.6.9, Digest 188.8.131.52). 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 (Digest 10).
184.108.40.206 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, that is, if the claimant takes no part in the operation of the corporation (Digest 4.6.3, Digest 220.127.116.11). 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 (FCA A-296-86, CUB 12019). 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. Determination must be made as to whether the shareholder is engaged in the operation of a business. For information on how this is determined, see Digest 4.6.3. 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, any income arising out of self-employment is earnings for EI benefit purposes (EI Regulation 35(1)(b)).
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 (FCA A-136-96, CUB 31814, FCA A-296-86, CUB 12019).
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 (FCA A-136-96, CUB 31814). 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 (Digest 5.16.9, Digest 18.104.22.168). 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 (EI Regulation 35(1)).
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 (EI Regulation 35(10)). 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 (EI Regulation 35(10)). 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 (CUB 12219). 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.
22.214.171.124 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. A partnership agreement may set out a percentage under which the net profits of the partnership are to be shared which may be different than the percentage owned. In that case the claimant’s share of the net income is the percentage share of the net profits and not the percentage of ownership.
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 analyze further whether any portion of the self-employment income arose from investment, or the extent of the self-employment itself (CUB 31090). 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 (CUB 31090). However, as already mentioned 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 (Digest 126.96.36.199).
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 (CUB 25111).
188.8.131.52 Federal or provincial farming income subsidies
According to Black’s Law Dictionary, Sixth Edition, 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.
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 that are earnings for EI benefit purposes (FCA A-178-86). Moneys must clearly display the character of a consideration given in return for work done by the recipient in order to be considered earnings (FCA A-597-94).
Therefore, all income support subsidies, intended to compensate for lost income, are considered when determining the income of a farmer. 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, that is, 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.
184.108.40.206 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 Commission considers the claimant's share of the income that the business earned during the relevant period, whether the claimant receives their share or not (FCA A-136-96, CUB 31814).
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 (FCA A-136-96, CUB 31814).
5.16.3 Excluded income from the calculation of self-employment earnings
Various income sources may appear to constitute earnings, but upon examination of the reason for the payment, are not income arising from employment. As a result, income which does not arise from employment, including self-employment, does not require inclusion in the determination of earnings to be considered for EI benefit purposes. Although the following are related specifically to self-employment, a general example of this principle is income received from a lottery winning. There is no link whatsoever to the employment an individual may have and the fact that they won money by playing a lottery.
220.127.116.11 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 (Digest 5.16.1).
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.
18.104.22.168 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.
22.214.171.124 Payments under an insurance policy
According to Black's Law Dictionary, Sixth Edition, 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. 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 and thus cannot be considered to be a subsidy. A grant is the bestowal or gift of land or money. This gift or bestowal may be given in exchange for some sort of compensation paid by the recipient. A grant may also be given conditional on the production of a service or a product.
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 (EI Act 126(14)).
5.16.5 Consideration of expenditures
Earnings of claimants who are self-employed are to be taken into account after deducting the operating expenses, other than capital expenditures, from the gross income from that employment (EI Regulation 35(10)(b) and (c)). The prevailing principle in determining the income and expenses of a self-employed person is that income should be matched with the expenses incurred in earning that income.
Expenditures made in the course of pursuing self-employment are spent in one of two categories: they either constitute operating expenses or capital expenditures. The classification into which an expenditure falls depends on whether the expenditure is made for an item which is exhausted while earning the revenue for which it was incurred, defined as an operating expense, or for the purchase of an asset which continues to exist, and will benefit future operating periods of the business, defined as a capital expenditure. Both operating expenses and capital expenditures are detailed in the following paragraphs.
126.96.36.199 Operating expenses
Black's Law Dictionary defines operating expenses as the cost of operating a business, such as rent, wages, utilities, and similar day-to-day expenses, as well as taxes, insurance, and a reserve for depreciation. As reported on the businesses’ income statement, 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 are the specific expenses and costs associated with a company’s main activities to benefit a finite period as they are spent 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. There are two types of operating expenses, ongoing and job-specific, which may vary depending on the type of business.
Ongoing expenses represent the cost of doing business and occur on regular basis whether income is generated or not. These may include rent, insurance, wages or salary for regular employees, licenses, and utilities. They may also include similar day-to-day expenses such as supplies, property, sales and other taxes paid by the business, advertising expenses, interest on business loans, maintenance or repair costs, 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. Lawyer and accounting fees are also considered operating expenses, unless these amounts are part of the start-up costs of a business, in which case they are a capital expenditure.
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.
Operating expenses include only those expenses relating to the business and not expenses incurred for personal or family reasons. For example, bank charges applicable to the business are operating expenses. However, if the claimant is using a personal chequing account with a flat monthly service fee to pay business expenses along with personal ones, this is not an operating expense. Operating expenses may also include costs incurred because the business operates out of the claimant's household, these costs must be demonstrated as additional to the claimant's normal household expenses.
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.
188.8.131.52 Capital expenditures
Capital expenditures (or balance sheet expenditures) are spent to acquire or to improve assets. Black’s Law Dictionary defines an asset as a financial contract or physical object with value that is owned by an individual or company, which can be used to generate additional value or provide liquidity. The assets benefit the business over one or more reporting periods beyond the period of acquisition or improvement. A 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.
A capital expenditure is not an operating expense. Deducting the entire cost of an asset from the income for a specific period when the asset will be used beyond that period distorts the match of revenue and expenses. This gives an erroneous picture of the earnings for EI benefit purposes gained for that period.
While the total cost for the purchase or improvement of assets cannot be deducted from gross income, capital expenditures made for assets having limited lives, such as equipment and buildings, do have an operating expense associated with them. The operating expense most often associated with fixed assets is that of depreciation.
Depreciation expenses or costs arise from capital expenditures on buildings and equipment and represent the loss or reduction in their 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 an operating expense.
The purchase of inventory is a capital expenditure and not an operating expense. An inventory is goods held for sale or lease, raw materials, work in progress or materials consumed in a business. In accounting inventory it can also refer to the segment of financial statements reflecting the value of the businesses raw materials, work in progress, and finished goods. However, if 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.
5.16.6 Calculation of self-employment earnings
The entire income arising from any employment is earnings (EI Regulation 35(2)). Self-employment on one's own account or in a partnership or co-adventure is included in the meaning of employment (EI Regulation 35(1)(b)).
Section 35(10)(c) of the EI Regulation clarifies how self-employment income is calculated. Income includes the amount of the gross income from that employment remaining after deducting the operating expenses, other than capital expenditures, incurred therein (EI Regulation 35(10)(b) and (c)). The characterization of the expense must be based on the object sought in incurring the expense (that is, providing a product or offering service) and not when it was incurred (FCA A-423-11).
In other words, on-going operating expenses (such as salary and rent) and job-specific operating expenses (such as the purchase of specific materials needed to accomplish the job) are applied to the period in which the work is performed to generate revenue.
For example, a snow clearing business may operate during a limited yearly window, but some expenses, such as vehicle maintenance, may only occur after the season is over. Since those expenses occurred to generate income (the object sought) during the winter season, they should be associated to this period.
To calculate earnings, the method chosen should be one that most accurately matches expenses with the income that those expenses generated. In some cases, the use of annual statements may be preferable to relying on monthly statements. The former will include all actual expenditures incurred in the fiscal year, such as depreciation and fixed costs (such as rent).
Earnings for a particular week may be estimated by using monthly financial statements, invoices or any other accounting documents. Adjustments may be required upon receipt of the year-end statement.
Earnings considered for EI benefit purposes, including those arising from self-employment, are determined and allocated on a weekly basis since the week is the basic period used in the legislation.
If a weekly breakdown of actual gross income and operating expenses is not possible, the income may be calculated using other methods.
If gross income is known on a week-by-week basis but exact operating expenses are difficult to determine, or operating expenses vary widely week to week, income may be calculated by deducting a percentage for the operating expenses. The percentage that the operating expenses absorb of the gross income may be used if such an average is known.
If the exact weekly gross income cannot be determined, an average income based on the total gross after deducting operating expenses for the period in question may be used. This method should not be used in cases where the claimant is not engaged in self-employment for a considerable time in the applicable period unless there is no information as to when the actual work was performed (CUB 10761).
These methods are used when difficulties arise in determining income and not when it is more advantageous to a claimant whose income widely fluctuates over the period of operation (CUB 28198).
5.16.7 Allocation of self-employment earnings
Once calculated, the reason for the earnings payment must be examined in order to determine the period to which it will be allocated. One must verify if the earnings arose from the performance of services (Digest 5.16.8) or paid as the result of a transaction (Digest 5.16.9). The type of contractual arrangements entered into with customers or clients determines which applies. Contractual arrangements of self-employment are either service contracts or sales contracts, and these contracts may be express or implied.
According to Black's Law Dictionary, Sixth Edition:
- An express contract is an actual agreement of the parties, the terms of which are openly uttered or declared at the time of making it, being stated in distinct and explicit language, either orally or in writing.
- An implied contract is inferred by the law as a matter of reason and justice from the act or conduct of the parties. An implied contract may arise where one party, without being requested to do so, renders services under circumstances indicating that he or she expects to be paid thereof, and the other party knowing the circumstances, avails himself of the benefit of those services. An implied contract is an agreement which legitimately can be inferred from the intention of the parties as evidenced by circumstances and ordinary course of dealing and common understanding.
Once the determination is made with respect to the nature of the agreement giving rise to the earnings (performance of services or transaction), allocation of these moneys can proceed pursuant to Regulation 36.
5.16.8 Performance of service(s)
Work performed over a period of time that does not result in the transfer of property is defined as the performance of a service. Income received can be attributed directly to the work performed, and often, but not always, a contract will be entered-into which specifies the work to be performed. An example of self-employment involving the performance of service is consulting, where an individual or company has retained the self-employed person to provide their professional services.
Performance of service is also said to exist when a self-employed worker engages others to perform work on their behalf or on behalf of an entity such as a partnership or corporation.
184.108.40.206 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 (EI Regulation 36(6)).
For example, in the case of a seasonal operation, when calculating self-employment earnings, all of the revenue, and the annual expenses incurred for the purpose of generating income during its limited operational window must be considered. It is the income thus calculated that must be allocated to the weeks in which the services were performed, (FCA A-423-11).
220.127.116.11 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.
18.104.22.168 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 that is immediately negotiable. This includes cash tickets issued to farmers. A cash ticket is a negotiable instrument and is considered to be the same as the receipt of cash or a cheque. 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 is issued. A storage ticket is a receipt issued to the farmer recording the amount, type, and quantity of grain accepted for storage.
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 against the amount to be received when the products are finally sold (Digest 22.214.171.124). 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.
126.96.36.199 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, 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, 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 EI Regulation 36(7)(a) delineates between farming transactions and non-farming transactions, 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 (EI Regulation 36(7)(b)).
If no work was performed, then the earnings are allocated to the week of the transaction.
188.8.131.52 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. Accordingly, in situations where the work was performed over a period which includes partial weeks then the earnings are to be allocated proportionally. For example, if a transaction occurred on a Tuesday, earnings would be pro-rated to obtain daily earnings, resulting in three days’ worth of earnings being allocated to the week of the transaction. The balance of the earnings would be spread proportionately over the other weeks where the work giving rise to the transaction was performed.
5.16.10 Allocation of earnings arising from neither a performance of service nor a transaction
Earnings which cannot be attributed to either performance of a service or a transaction are allocated equally to each week where the money was earned (EI Regulation 36(6.2)).
5.16.11 Allocation of farming income subsidies
Income received by farmers in the form of subsidies (Digest 184.108.40.206) and that are earnings for EI benefit purposes are allocated to the week the subsidy is received, without regard to any other earnings that may have also been received in that week, whether they arise from the performance of service or a transaction (EI Regulation 36(7)(b)). If other earnings are present, they are allocated depending on the nature of the payment (as the performance of service or transaction).
5.16.12 Allocation of advance or draws
Advances on wages, salary, commissions, sales or profits are allocated to the periods in which they are earned and not when the advance is paid. In the case of an advance (Digest 220.127.116.11) against wages or salary, the amount advanced is allocated to the period the work is or will be performed.
In the case of commissions, the amount is allocated to the period in which the services are or will be performed to earn the commissions (Digest 5.8.0). Where there are no services as such, these moneys are allocated the same way as any transactional earnings (Digest 18.104.22.168).
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