If you are running a business, your transactions may have different financial consequences depending on whether, or not, an employee is an arm’s length employee.
For taxation, employment insurance, and other matters, the Canadian government distinguishes between arm’s length parties and not-at-arm’s-length (or arm-in-arm) parties. In your recordkeeping, it is prudent to note the distinction. If you are unsure whether an employee is an arm’s length employee, you can petition the government to rule on the matter.
Before considering the implications of providing benefits to an arm’s-length employee, familiarize yourself with the term and understand how it applies to business operations.
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What It Means to Be an Arm’s Length Employee
An arm’s length employee is an employee who does not have any other relationship or common interest with the employer aside from employment.
The Canadian government does not consider an individual who is a blood relative or related by marriage to their boss to be an arm’s length employee.
Tax Implications of Arm’s Length Transactions
Any transaction that involves giving, buying, or selling something of value could be taxable depending on the Canadian tax code. If individuals buy or sell things at below or above market value because they have a personal relationship, the government might assess tax according to the market value of the item rather than the actual sale or purchase price.
For example, if a mother sells a home to her daughter at $50,000 when the actual value is $150,000, the government might require the mother to pay capital gains tax as if she had sold the home for $150,000. This prevents the family from using the sale to avoid paying taxes. This example is for illustrative purposes only and is not tax or legal advice.
Employment Insurance (EI) Implications
Employers deduct EI premiums and contributions to the Canada Pension Plan from the wages the employee receives. The Employment Insurance Act uses arm’s length status to determine eligibility for EI protection.
Employment insurance operates on the principle that the employer and the employee are dealing at arm length. The employee wants to work, and an employer who lays off a worker is acting against the employee’s interest. Employment insurance protects workers in situations when their employer no longer needs them to work.
If the employer and employee have interests that align, they could abuse the system for personal gain. For example, the owner of a family business could create a pro forma job for their child and then lay off the child nominally so the child could receive employment insurance benefits.
An arm’s length employee is not eligible for employment insurance unless the terms of employment are the same as if they had an arm’s length relationship. If a business owner employs their children under the same terms as other employees, their children could be eligible for employment insurance after the layoff.
Implications for Other Types of Insurance
Insurance policies, such as health insurance, life insurance, and disability insurance, that you provide as an employer can be part of a benefits package that the employer uses to recruit and retain workers. Insurance policies have tangible value, so the business expense of providing insurance could affect your tax burden differently depending on whether you are an arm’s length employer for your workers.
Enrolling your employees in a group health or disability insurance plan could simplify your tax situation if you provide every employee with the same health insurance or the same health insurance options,
With group enrollment, the value of the coverage you provide to arm-in-arm employees would be the same as the benefits you provide for the rest of your workers. The Canada Revenue Agency would not have a reason to assess your business expenses differently.
Set Up Insurance for All Your Employees with Group Enroll
Whether you are the owner of a small business or part of the human resources department of a larger company, you can help your employees find great rates for group health insurance. Group Enroll can help you find plans for arm-in-arm and arm’s length employee coverage from leading Canadian insurance providers.
You can set up a consultation with a Group Enroll using this convenient form. Contact us by e-mail at firstname.lastname@example.org. Our physical address is at 10 Great Gulf Drive, Unit 5, Vaughan, ON, L4K 5W1.