New EI rules good for some, bad for others

Beginning January 2010, self-employed individuals (including many financial advisors) can opt into the Employment Insurance (‘EI’) system, thereby qualifying for special EI benefits. Bill C-56, the “Fairness for the Self-Employed Act” received Royal Asset on December 15, 2009. This legislation allows self-employed persons to, for the first time, pay premiums on a voluntary basis – and claim federal EI benefits under certain situations.

For these purposes, self-employed individuals generally include:

• Sole proprietors who declare self-employed earnings when they file their tax return; or
• Corporate business owners who are not entitled to EI benefits under the pre-2010 EI program because they control more than 40% of the voting shares of the corporation.

Is this a good idea for the self-employed? For some – but not for everyone. It’s a good idea to discuss the pros and cons of this new law with your self-employed clients.

Example:

Art is a self-employed incorporated physiotherapist. Currently Art earns a salary of $75,000 from his corporation. Art is 56 years old and married with a grown family. Art’s accountant suggested he look into the new rules for EI. What do you tell him? Under the new rules, EI will provide “special” benefits – the self-employed generally are not entitled to “regular” income replacement benefits for loss of employment. The special benefits include:

• A maximum of 15 weeks of maternity leave benefits*
• A maximum of 35 weeks of parental/ adoptive benefits*
• A maximum of 15 weeks of sickness benefits
• A maximum of 6 weeks of compassionate care benefits

In discussing Art’s situation, his advisor discovers that Art’s operating company (Opco) has been in existence for the past 20 years and has a healthy amount of retained earnings that Art can draw on as required. He also has critical illness insurance, and Opco has purchased disability and life insurance on Art’s life. Art and his wife have a grown family and do not anticipate adding to it in the future. That leaves only compassionate care benefits under the EI program that may be helpful in Art’s situation. Is the premium cost worth it to him? The maximum premium for 2010 will be $747.36 ($587.52 in Quebec). Let’s look at what Art has to do to qualify.

The legislation requires that self-employed individuals must:

• Opt into the program at least one year before claiming benefits. HRSDC has extended the deadline to qualify to receive benefits beginning January, 2011 as long as individuals opt into the program by no later than April 1, 2010. After this deadline, premiums must be paid for a full year before benefits can be claimed.
• Have a minimum of $6,000 in self-employed earnings in the preceding calendar year. .
• Be able to opt out of the program at the end of any tax year, provided no benefits have been claimed.
• Continue to participate in the program for as long as they are self-employed if any benefits are claimed.
• Pay the same EI premiums as any salaried individual (in 2010 that is 1.36% of salary in Quebec, and 1.73% elsewhere in Canada to the maximum premium mentioned above). There is no employer premium required because there are no regular benefits under this program.

From the above information, Art has adequately provided for his retirement – including any unexpected work interruptions. If he does not anticipate making an EI claim, there is no point in opting into the new program.

Art is not an ideal candidate for the newly-introduced program; but examining the pros and cons with your self-employed clients can afford you yet another opportunity to review their retirement and insurance needs. Many recently-established entrepreneurs will find participating in EI helpful, so a discussion will help them make a fully-informed decision.

Example:

Heather is a self-employed graphic designer. At age 28, Heather has been working on her own for the past 5 years and earning approximately $40,000 annually. Heather is engaged and will marry within the next year. In her circumstances, opting into EI will provide her with additional support for maternity, sickness and other benefits that she may need in the coming years.Examining the facts in each situation can help you bring added-value advice to your entrepreneur clients.

(* Self-employed individuals in Quebec receive maternity and parental benefits through the Quebec Parental Insurance Program (“QPIP”) which is provided by the provincial government. Under the new federal EI legislation, these individuals can receive additional benefits of sickness and compassionate care.)

Carol Bezaire

Tax & Estate

Carol Bezaire , PFPC, TEP, CLU, is the vice-president of tax and estate planning at Mackenzie Investments. Carol can be contacted at: cbezaire@mackenzieinvestments.com