Overpaying Canadian Pension Plan (CPP) and Employment Insurance (EI) Premiums

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Prevent duplicate payments with strategic planning and a payroll tax review

Business owners and their related companies must remain aware of two issues related to their Employment Insurance (EI) and Canadian Pension Plan (CPP) requirements or risk a significant impact to their bottom-line.

  • Employment insurance for related employees
  • Employee transfers to related companies

Employment insurance for related employees

Business owners do not have to insure any employee with a non-arm's length relationship with the company. This includes employees related by blood, marriage, common-low or adoption to the owner of a corporation. This condition also includes employees with more than 40% of the corporation's voting shares. If the employees individually own less than 40% of voting shares, the Canada Revenue Agency (CRA) deems the relationship not within arm's length and the employer must pay EI premiums. However, they may still be excluded from EI coverage if they are not dealing at arm's length with the employer. Unfortunately, most companies and their affiliates remain unaware of this condition and lose money by making unnecessary remittances.

Employee transfers to related companies

Businesses that opt to transfer employees to an affiliate during the year could be making a costly business decision. For instance, if an employee reaches their EI or CPP maximum and later transfers to an associate company, the new employer must continue paying the premium because the CRA does not observe or include the previous employer's remittances. As a result, the sum of the EI premiums and the CPP contributions made by the former employer and the successor often exceed the maximum annual contributions for the employee. And while the employee can obtain a refund for their over-payment in their tax return, business owners cannot.

How PwC can help

PricewaterhouseCoopers' Payroll Tax Services group team can help answer your CPP and EI rule questions and analyze your needs based on a payroll tax review. We will assist you with a strategic plan to move your employees at the close or start of the year to prevent over-payments.

Contact us today to discuss your questions about preventing CPP and EI over-deductions.