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 that which resembles income earned by labour (FCA A-136-96, CUB 31814). As a result, to be considered earnings, they must arise from some type of employment. Included in the meaning of employment is self-employment (EIR 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 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 (EIR 30(5)). Self-employment involves working and striving to achieve a profitable financial enterprise. The efforts of a self-employed person are part of what makes a business run.
People who have only invested in a business and who are not personally engaged in self-employment, expect profits through the efforts of the people who are running the business (for example, 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, offering a service, or involvement in the managing of individuals who attempt to generate income. As long as there is a finding that the claimant is engaged in the operation of a business (for example, there is participation, labour, or work by the claimant) moneys resulting from that self-employment are earnings for EI benefit purposes (EIR 35(2)).
5.16.2 Determination of earnings from self-employment
Once there has been a determination that the claimant is self-employed, the claimant's share of all income from that self-employment is considered earnings, and may affect EI benefits payable (EIR 35(2)). This is true whether those earnings arise from the work of the claimant, or from the work of others on their behalf. This does not include income that is solely for investment purposes.
184.108.40.206 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 for EI benefit purposes, unless the claimant sells the business or permanently withdraws from its operation.
It is not the mere ownership of a business that leads to a finding of being self-employed. Rather it is a determination that the claimant is engaged in the operation of that business, which renders the claimant self-employed. 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, there can be no self-employment or any earnings from self-employment, (Digest 220.127.116.11). When a claimant temporarily ceases to take an active part in the operation of the business during periods when the business continues to operate, it does not mean they are no longer engaged in the operation of the business (Digest 4.6.10, Digest 24). This is often the case for EI self-employment special benefits, where individuals may take a partial or full temporary leave from their business activities 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 an ill family member.
18.104.22.168 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 assistance in connection with a business enterprise, is self-employed on their own account, 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 kind 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 22.214.171.124). In addition, if it is determined that no actual employment exists, the claimant’s availability should be reviewed, taking into consideration the time the claimant is spending providing assistance to the business enterprise (Digest 10).
126.96.36.199 Working in a corporation in which shares are owned
Engagement 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, the claimant takes no part in the operation of the corporation) (Digest 4.6.3, Digest 188.8.131.52). 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 additional functions for which wages or salaries are not paid.
When a claimant is receiving any income from a corporation, it must be determined 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 an investment in that business.
Income from a corporation 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.
If the claimant owns shares in a corporation, income may also arise through the payment of dividends. Dividends are paid to shareholders to provide a return on the shareholder's investment in the corporation. Directors of corporations decide if or 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 during a specific period, is held by the corporation and not distributed to shareholders as dividends. Determining the claimant's role(s) in the corporation will reveal the type of income they receive.
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 stocks. As employees, in addition to being shareholders, 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 concluded 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. A determination must be made as to the extent to which a shareholder is engaged in the operation of a business (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 for the work at all, as an employee would. Payment received for any work performed under a contract of service is earnings from employment, however, it must be determined whether earnings arise from any work performed in operating the corporation, without payment.
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 (EIR 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 should not 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 claimant’s 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 the treatment of earnings based on the structure of a business, one must pierce the corporate veil by looking beyond the fact that the business is a corporation, in order to consider earnings arising from self-employment in a corporation (Digest 4.6.8). 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 claimant’s share of the earnings arising from that self-employment must be determined.
If there has been a determination that the claimant is self-employed, the fact that they did not actually receive the income is not relevant; 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 claimant’s (Digest 5.16.9; Digest 184.108.40.206). Therefore, payment does not have to have been issued for a determination that the moneys are part of the entire income arising out of self-employment. The definition of income includes income that is received, or to be received from an employer or any other person (EIR 35(1)).
For those 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 (EIR 35(10)). Since the claimant only has a right to their 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 the claimant made in the business (EIR 35(10)). This is true whether the claimant is self-employed and operating their business as a sole proprietorship, 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.
The claimant's share of the self-employment income is earnings. The claimant cannot assign any portion of that income to any other person, unless that person has a legal right to claim a share of the income from the business (CUB 31091). As well, the income cannot be excluded as earnings, should the claimant's share of the net income of the business be left within the business to meet current or future business obligations.
220.127.116.11 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 their earnings. In partnerships, the portion of the earnings that are considered the claimant's share of the income are based on the terms of 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 of 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 by law, that earnings be analyzed further to determine what portion of the self-employment income arose from investment, versus the self-employment itself. A portion of the claimant's income from self-employment cannot be excluded from consideration as earnings on the basis that it 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 arising out of employment (Digest 18.104.22.168).
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 59511).
22.214.171.124 Federal or provincial farming income subsidies
According to Black’s Law Dictionary, 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 broad enough 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, CUB 25472).
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 earnings.
An income support subsidy includes any subsidy that pays for differences in the price for which goods are sold and a minimum price level for the product (that is, price subsidy), or any subsidy that guarantees the individual's income level (that is, income subsidy). An income support subsidy does not include:
- a subsidy to cover the cost of courses 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
- any subsidy which is compensating for a decrease in the market value of the land
126.96.36.199 Advances or draws
Payments may be received from customers or clients as deposits or advance payments on services to be rendered, items to be provided, or sales to be made. These payments are earnings 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 due to them, or on the business operator's share of the profits. A company may also pay advances based on anticipated sales of products. An advance is a payment for 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, or
- 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, or when 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 they are 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. However, upon further examination of the reason for the payment, it may be determined that they are not income arising from employment. As a result, income that does not arise from employment, including self-employment, is not included in the determination of earnings for EI benefit purposes. Although the excluded earnings may relate specifically to self-employment, there is no link to actual employment by an individual.
188.8.131.52 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, a self-employed person may generate income by renting a private basement apartment in their home. Rental income by virtue of land ownership is not earnings when there is no correlation between the payment of moneys and actual employment. This should not be confused with income from rental properties, when such rentals are part of the self-employment activity. In these cases, the resulting earnings would be income arising out of employment, and not simply due to ownership.
184.108.40.206 Business or farming loans
Any amounts received from a business or farming loan are not considered 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 does not arise from employment.
220.127.116.11 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 a specific type of loss. 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 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 (Digest 18.104.22.168).
Additionally, the payment of a portion of the premiums by a provincial or federal government is not considered 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 (EIA 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 (EIR 35(10)(b) and (c)). The general 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 2 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 (that is, an operating expense), or for the purchase of an asset which continues to exist, and will benefit future operating periods of the business (that is, a capital expenditure). These terms are explained in detail in the following paragraphs.
22.214.171.124 Operating expenses
Operating expenses are 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 (Black’s Law Dictionary). As reported on the business’ 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 2 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 a 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; however, it must be demonstrated that these costs are in addition 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 2 equal partners, 50% 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.
126.96.36.199 Capital expenditures
Capital expenditures (or balance sheet expenditures) are spent to acquire or to improve assets. An asset is a financial contract or physical object with value, that is owned by an individual or company, and which can be used to generate additional value or provide liquidity (Black’s Law Dictionary). 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 gained for that period, for EI benefit purposes.
While the total cost for the purchase or improvement of assets cannot be deducted from gross income, capital expenditures made for the purchase/acquirement of assets with a limited life span, (for example, equipment and buildings), do have an operating expense associated with them. The operating expense most often associated with fixed assets is known as 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 business’ raw materials, work in progress, and finished goods. However, if the inventory items are sold, the original cost of purchasing the item being sold may be deducted from the sales revenue, as well as 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 (EIR 35(2)). Self-employment on one's own account or in a partnership or co-adventure is included in the meaning of employment (EIR 35(1)(b)).
EIR 35(10)(c) 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 (EIR 35(10)(b) and (c)). The characterization of the expense must be based on the end product for which the expense was incurred (that is, providing a product or offering service) and not when the expense was incurred (FCA A-423-11; CUB 77802).
In other words, on-going operating expenses (for example, salary and rent) and job-specific operating expenses (for example, 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 during the winter season, they should be linked 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, such as averaging.
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 earnings, 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 70120).
These methods are used when difficulties arise in determining income, and not only when it is more advantageous to a claimant whose income widely fluctuates over the period of operation (CUB 79773).
5.16.7 Allocation of self-employment earnings
Once calculated, the reason the earnings were paid must be examined in order to determine the period to which they will be allocated. It must be verified whether the earnings arose from the performance of services or were paid as the result of a transaction (Digest 5.16.8; 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:
- 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 they expect to be paid thereof, and the other party knowing the circumstances, avails themselves of the benefit of those services. An implied contract is an agreement that can be legitimately inferred from the intention of the parties, as evidenced by circumstances and the 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 EIR 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 also exists 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.
188.8.131.52 Allocation of earnings arising from the performance of service(s)
The earnings of a self-employed claimant that 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 (EIR 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 that remains, that must be allocated to the weeks in which the services were performed (FCA A-423-11; CUB 77802).
The manner in which earnings resulting from a transaction are allocated, depends on when the transaction occurs and the amount of the payment.
184.108.40.206 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 (for example, crops, wood, livestock, eggs, grain, honey, fruit, vegetables, flowers, tobacco, etc.), products built from hand (for example, art, furniture, housing, clothing), but can also stem from services that may not fall as cleanly into the categories 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 the purchase and sale, which 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.
220.127.116.11 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 the same as the receipt of cash or a cheque. A transaction occurs in the week that delivery is made, even if the claimant agrees to defer payment for the product to a later date. Although a payment may be deferred, the product is still considered 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 more favourable. It is not considered 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, but a receipt or a storage ticket is issued instead. 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 18.104.22.168). This advance is not 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 eventual sale of the product. A loan received by a claimant is not earnings for EI benefit purposes, as it is not income arising out of employment, and must be repaid at a later date. 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 products sold over a specific period, but the exact dates of the sales are unknown or cannot be reasonably ascertained, the transaction may be considered to occur when the payment is made.
22.214.171.124 Allocation of earnings arising from a transaction
Earnings arising from a transaction are generally allocated to the specific weeks where the work that resulted in the transaction, was performed. This is done in a manner that is proportional to the amount of work performed during each of those weeks. This includes earnings from profits or commissions, which exceed the maximum yearly insurable earnings in effect at the time of the transaction, divided by 52.
An exception applies when earnings stemming from a transaction are less than or equal to the maximum yearly insurable earnings in effect at the time of the transaction, divided by 52. Those earnings 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 the earnings are allocated to the specific weeks where the work was performed, in a manner that is proportional to the amount of work performed during each of those weeks.
It is important to note that although EIR 36(7)(a) differentiates between farming transactions and non-farming transactions, the allocation of earnings stemming from all transactions (farming or not) is the same, with the exception of farming subsidies. Subsidies are always allocated to the week in which the subsidy was paid (EIR 36(7)(b)).
In all cases where no work was performed, the earnings are allocated to the week of the transaction.
126.96.36.199 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. These earnings are to be allocated in a manner that accurately and fairly reflects the work performed. Accordingly, in situations where the work was performed over a period that includes partial weeks, 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 3 days’ worth of earnings being allocated to the week of the transaction. The balance of the earnings would be spread proportionately over any other weeks in which the work that gave rise to the transaction was performed.
5.16.10 Allocation of earnings arising from neither a performance of service nor a transaction
Earnings that cannot be attributed to either performance of a service, or a transaction, are allocated equally to each week where the money was earned (EIR 36(6.2)).
5.16.11 Allocation of farming income subsidies
Income received by farmers in the form of subsidies that are earnings for EI benefit purposes, are allocated to the week the subsidy is received (Digest 188.8.131.52). Any other earnings received in that week, whether from the performance of a service or from a transaction, are not taken into account when allocating the subsidy (EIR 36(7)(b)). If other earnings are present, they are allocated depending on the nature of the payment (for example, performance of service or transaction), concurrently with any subsidies received.
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 against wages or salary, the amount advanced is allocated to the period the work is or will be performed (Digest 184.108.40.206).
In the case of commissions, the advance or draw is allocated to the period in which the services to earn the commissions, are or will be performed (Digest 5.8.0). Where there are no services performed, these moneys are allocated the same way as any transactional earnings (Digest 220.127.116.11).
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