02/07/2013 08:09 EST | Updated 04/09/2013 05:12 EDT

EI rules for family businesses criticized

Each year hundreds of thousands of small business owners and their employees, some of whom are family members, pay into the employment insurance system, but few realize they are unlikely to be eligible to collect benefits.

It was a rude awakening for Tariq Anwar, who worked in his family's Ottawa restaurant for 14 years.

"For me, it's a pretty simple equation. I paid this money so it should be pretty simple for me to get the money back," Anwar told CBC News.

Throughout Anwar's employment at the Zuni Grill, he and his parents paid EI premiums as employee and employer.

But when his parents sold the restaurant last year, effectively laying their son off, Anwar learned he wasn't eligible to collect EI.

After weeks of questioning by an officer at the Canada Revenue Agency, Anwar got a letter saying he was uninsurable.

When he called for an explanation, the investigating officer told him he was automatically ruled out because he was related to the owner.

"I'm angry, very angry, and I think justifiably so," said Anwar.

"To be paying into a system that won't pay me back. I mean that's tantamount to fraud in my mind. These rules should be spelled out very clearly. Small businesses are the backbone of the economy. And small businesses most likely hire family members as employees."

Rules exclude family members

The rules are buried in the Employment Insurance Act, and they're contradictory, according to financial consultant Darren Earn.

"The law is unfair," he told CBC News. "The law specifically excludes family members from eligibility for benefits."

Earn has helped thousands of people like Anwar recover their EI premiums through his Winnipeg company, Grants International.

Earn said the cases usually lead to tax court, where judges often deem the rules unfair.

He said the problem stems from a 1991 clause in the EI Act which states that family members are not eligible to collect EI unless the minister of revenue deems them to be "unrelated" to the owners.

According to Earn, that potential exception by the minister is at the root of the problem – it allows the government to collect premiums on the unlikely chance someone is eligible.

But Earn said 90 per cent of family members who apply for EI benefits are rejected.

"The minister can deem you to be 'unrelated' and then you can claim benefits," he said.

"That's how it works. So you're out until they let you in. But because they might be able to let you in, they force Canadian family businesses right across Canada to pay premiums. Because they may pay out benefits down the road. And it's not fair."

Earn said the government is effectively having its cake and eating it too. By his calculations, Ottawa collects about a billion dollars a year from family members working in small businesses.

The purpose of the law was to prevent fraud by people laying off family members only to collect benefits.

"That was the purpose – not to collect premiums from a bunch of family businesses out there who are specifically excluded by the law."

But Earn said a better solution would be to allow family members to opt out of EI altogether, instead of insisting they pay premiums up front.

Onus on family members

NDP human resources critic Chris Charlton told CBC News the system is unfair and the entire EI program should be overhauled.

"I think we need to support small businesses," she said.

"We need to have a look at how we can support them better as opposed to starting from the premise that everybody is out to get a free ride."

As for the government, the Human Resources Department indicated in an email that family members can only collect EI if they can prove they worked like a regular non-related employee.

Tariq's father, Feroze Anwar, argued he treated his son no differently than any other employee and that Tariq was expected to work long hours with no special perks.

Now Feroze Anwar feels duped by the system.

"When the money is deposited by family members into these funds they should be told," he said.

"In the CRA web site or the HRDC web site nothing is mentioned about it. And we have been paying into it, sometimes we have been borrowing money to pay into this fund. And now we are getting a kick in our back. That's very unfair, very un-Canadian."

The Anwars said they can't afford a consultant or a lawyer, but they intend to appeal the ruling on their own.

Failing that, they will try to get a refund of their premiums, a process Earn said rarely works for individuals with little knowledge of the system.