Employee who is a family member or a related person

You may have employees who are family members or are considered related to you.

Depending on the facts of the working relationship, your employee’s employment may not be insurable and you may not have to deduct EI premiums.

On this page

• Steps
• References

Steps

1. Determine if your employee is considered related to you

   You (as the employer) may have employees who are considered related to you if one of the following situations applies:

   • Confirm if your employee is considered related to you by:

     Blood relationship

     The following individuals are related by blood:

     • A parent and a child (or another descendant, such as a grandchild or a great-grandchild)
     • A brother and a sister

     Blood relatives do not include more distant relatives such as aunts, uncles, nieces, nephews, or cousins.

     Child

     Under the Income Tax Act, a child of an individual includes:

     • A person for whom the individual is the legal parent
     • A person who is wholly dependent on that individual for support if the person is or was, in law or in fact, under the individual's custody and control before the person reached 19 years of age
     • A child of the individual's spouse or common-law partner
     • A spouse or common-law partner of the individual's child, as well as the spouse or common-law partner of a stepchild or of a person considered to be the individual's child

     Brother

     Under the Income Tax Act, an individual's brother includes:

     • The brother of the individual's spouse or common-law partner
     • The spouse or common-law partner of the individual's sister

     It does not include the spouse or common-law partner of the sister or of the brother of the individual's spouse or common-law partner.

     Sister

     Under the Income Tax Act, an individual's sister includes:

     • The sister of the individual's spouse or common-law partner
     • The spouse or common-law partner of the individual's brother

     It does not include the spouse or common-law partner of the brother or of the brother of the individual's spouse or common-law partner.

     Marriage

     Individuals are connected by marriage if they are legally married to each other. They are also related to anyone connected by blood relationship (parents and siblings) to their spouse.

     If the marriage is dissolved because of divorce or death of a spouse, the individual ceases to be connected by marriage.

     If there is a breakdown in the relationship, they are considered to continue to live in a marriage until they have lived separate and apart for 90 consecutive days.

     Common-law partnership

     Individuals are connected by common-law partnership if they are in a common-law partnership with each other. The Canada Revenu Agency (CRA) considers that two individuals are in a common-law partnership in one of the following situations:

     • They live together in a conjugal relationship and have done so for a continuous period of at least 12 months
     • They live together in a conjugal relationship and have a child together (this includes through adoption), in which case the 12-month period does not apply

     They are also related to anyone connected by blood relationship (parents and siblings) to their common-law partner.

     If there is a breakdown in the relationship, they are considered to continue to live in a common-law partnership until they have lived separate and apart for 90 consecutive days.

     Adoption

     Individuals are connected by adoption through adoption if one individual is the adopted child of the other.

     In addition to their parents, the child is also related to their siblings, grandparents and great-grandparents.

     Adoption includes a legal adoption and an adoption in fact (also known as de facto adoption).

     The following factors are considered when determining whether there is a de facto adoption:

     • Actual control and custody
     • An exercise of parental care and responsibility on a continuing basis
     • Dependency
     • Proximity to each other

   • Confirm if your employee is considered related to a corporation or a partnership

     Your employee and a corporation

     If you are a corporation, your employee is considered related to you when your employee is:

     • Related to a person who controls the corporation
     • A member of a related group who controls the corporation
     Your employee and a partnership

     Partnerships are not a distinct legal person from the partners, according to the law. An employment contract that is agreed upon between an employee and any partner of a partnership would bind all its partners.

     In a situation where an employee is related to any of the partners, the employment contract would be with each of the partners. Therefore, an employee who performs services for a partnership and who is related to one or more of the partners is related to the partnership (employer).

Learn more: Income Tax Folio S1-F5-C1, Related Persons and Dealing at Arm's Length

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•  If your employee is not considered related to you, do not continue to the next step.

  You must deduct CPP, EI and income tax as you would for your other employees.

  Learn more: How to calculate

• If your employee is considered related to you, continue to: Step 2 – Determine if you need to deduct CPP contributions.

2. Determine if you need to deduct CPP contributions

    If you (as the employer) and your employee are related, you must deduct CPP contributions as you would for your other employees, unless your employee is a spouse or common-law partner and you cannot deduct the remuneration paid as an expense under the Income Tax Act.

   Other than in this situation, your obligation to deduct CPP contributions applies regardless of whether you are related or not.

   Learn more: Calculate CPP contributions deductions

3. Determine if you need to deduct EI premiums

   If you (as the employer) and your employee are related, your employee’s employment may not be insurable because you and your employee are considered to be dealing with each other at non-arm’s length .

   If the employment is not insurable, you are not required to deduct EI premiums. 

   Your employee’s employment may be insurable if, after reviewing all the circumstances of the employment, it is reasonable to conclude that you would have entered into a similar contract with a person with whom you deal at arm’s length.

   Factors used to determine if you had entered into a similar contract

   All the facts about the working relationship must be reviewed to determine whether other employees would have been hired under a similar contract of employment.

   Generally, the CRA reviews a combination of the following factors to determine whether the parties are dealing with each other at arm’s length (not just a single factor):

   • Remuneration paid
   • Terms and conditions of employment, such as the hours of work
   • Duration of work performed
   • Nature and importance of the work performed

   Learn more: Not dealing at arm's length for purposes of the Employment Insurance Act (EIA)

   What if you are not sure if your employee’s employment is pensionable or insurable

   If you or a person working for you is not sure of the worker's employment status, either one of you can request a CPP/EI ruling to determine the status and whether the employment is pensionable, insurable, or both.

   Learn more: Request a CPP/EI ruling

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   •  If your employee’s employment is not insurable, do not deduct EI premiums.

   • If your employee’s employment is insurable, you must deduct EI premiums.

     Learn more: Calculate EI premiums deductions

4. Determine if you need to deduct income tax

    If you (as the employer) and your employee are related, you must deduct income tax as you would for your other employees.

   Your obligation to deduct income tax applies regardless of whether you are related or not.

   Learn more: Calculate income tax deductions

5. Report the payment on a T4 slip

   You must report the following on a T4 slip:

   • Box 14 – Employment income
   • Box 24 – EI insurable earnings (if the employment is insurable)
   • Box 26 – CPP/QPP pensionable earnings
   • Box 28 – Exempt (EI) (if the employment is not insurable)
   • Any applicable codes for taxable benefits

   Learn more: T4 slip – Information for employers

References