Digest of Benefit Entitlement Principles - Chapter 5

5.16.0      EARNINGS FROM SELF-EMPLOYMENT

5.16.1      Self-Employment 
5.16.1.1  Assistance to a Business Enterprise 
5.16.2     Working for a Corporation in which Shares are Owned 
5.16.3     The Claimant's Share of the Proceeds from Self-Employment 
5.16.4     Earnings from Self-Employment in Farming 
5.16.4.1  Farming Transactions 
5.16.4.2  Federal or Provincial Farming Subsidies 
5.16.4.3  Payments under an Insurance Policy 
5.16.5     Earnings from Self-Employment in Employment Other than Farming 
5.16.5.1  Deductions for Operating Expenses 
5.16.6     Advances or Draws 
5.16.7     A Transaction Occurs 
5.16.8     Flow Chart—The Determination Process and Regulation 30 
5.16.9     Flow Chart— Determining Whether Engaged in the Operation of a Business

5.16.0    EARNINGS FROM SELF-EMPLOYMENT

All income directly or indirectly related to work or labour, as opposed to pure investment income, is included as earnings.¹ Thus, the entire income of a claimant arising out of any employment is earnings for benefit purposes.² Included in the meaning of employment is self-employment, whether on one's own account or in a partnership or co-adventure.³

Self-employment⁴ includes situations where claimants work alone as independent workers or contractors, as well as those situations where claimants are engaged in the operation of a business on their own account or in partnership or co-adventure.

It is not the mere ownership of a business that leads to a finding of being self-employed; rather it is a decision that the claimant is engaged in the operation of that business which makes the claimant self-employed. There can be no self-employment and no earnings from self-employment, if a claimant takes no part in the operation of the business or if the activities performed by the claimant are in the nature of exhibiting a natural concern for an investment.⁵ Taking no part in the operation of a business does not include periods when the business continues to operate and the claimant temporarily ceases taking part in its operation⁶.

Self-employed claimants, either on their own account or in a partnership or co-adventure, are considered to work a full working week⁷, and therefore are not unemployed,⁸ unless the self-employment activities are found to be minor in extent.⁹ If the claimant's involvement or engagement in the operation of a business is found to be more than minor in extent, a disentitlement for working a full working week is imposed.¹⁰

For practical purposes, when a claimant is found to be not unemployed or self-employed, and disentitled from receiving benefit, earnings are only allocated when the claimant's involvement or engagement in self-employment is minor in extent, even though income from all self-employment activities is earnings.

Self-employment includes operating a farm. Self-employed farmers may receive relief from a "not unemployed" disentitlement if they prove that during a specific period¹¹ they do not work or that the work performed on the farm is so minor in extent that it would not have prevented them from accepting full-time employment.¹² Earnings related to farming activities are considered whenever the farmer's activities are minor in extent.

Earnings from self-employment are divided into those derived from self-employment in farming¹³ and those derived from self-employment in employment other than farming¹⁴.

The income of claimants who are engaged in self-employment in farming is fifteen per cent of the farmers' gross income from farming transactions¹⁵ and any subsidies the farmers receive under any federal or provincial program¹⁶. Earnings from self-employment in farming are allocated to the week the farming transaction occurred¹⁷, or in the case of a subsidy, to the week in which the subsidy was paid¹⁸.

The income of claimants who are self-employed in employment other than farming is the amount remaining after deducting the operating expenses, other than capital expenditures, from the gross income from that employment¹⁹. This amount is allocated to the week in which the services that gave rise to the earnings are performed. Where earnings arise from a transaction, the earnings are allocated to the week in which the transaction occurred.²⁰

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1. D. Caron Bernier (A-136-96, CUB 31814);
2. EIR 35(2);
3. EIR 35(1); although regulation 30 on self-employed persons includes those persons who are employed in any other employment where they control their own working hours, information on income received by those persons is contained in 5.8.0, "Commissions" and 5.7.0, "Remuneration under a Contract of Employment";
4. for what is meant by self-employment, see 5.16.1, "Self-Employment";
5. see 5.16.1, "Self-Employment";
6. see 4.6.10, "Claim for special benefits";
7. EIR 30(1);
8. EIA 11(1);
9. EIR 30(2); see 4.6.4, "Exception to overcome the presumption of a full working week";
10. EIA 11(1) and EIR 30;
11. the period begins with the week in which October 1 falls and ends with the week in which the following March 31 falls; EIR 30(4);
12. EIR 30(4);
13. see 5.16.4, "Earnings from Self-Employment in Farming";
14. see 5.16.5, "Earnings from Self-Employment in Employment Other than Farming";
15. EIR 35(10)(b)(i); see 5.16.4.1, "Farming Transactions";
16. EIR 35(10)(b)(ii); see 5.16.4.2, "Federal or Provincial Farming Subsidies";
17. EIR 36(7)(a); see 5.16.4.1, "Farming Transactions" and see 5.16.7, "A Transaction Occurs";
18. EIR 36(7)(b); see 5.16.4.2, "Federal or Provincial Farming Subsidies";
19. EIR 35(10)(c); see 5.16.5.1, "Deductions for Operating Expenses" and see 5.16.3, "The Claimant's Share of the Proceeds from Self-Employment";
20. EIR 36(6); see 5.16.5, "Earnings from Self-Employment in Employment Other than Farming" and see 5.16.7, "A Transaction Occurs."

5.16.1    Self-Employment

For EI benefit purposes, earnings are income earned by labour or resemble income earned by labour.¹ As a result, earnings must arise from some type of employment. Included in the meaning of employment is self-employment, whether on one's own account or in a partnership or co-adventure.² Therefore, a claimant must be found to have worked or be engaged in self-employment for a determination of earnings to be made.

Self-employment may be defined as being engaged in labour or work on one's own behalf, rather than being employed by someone else under a contract of service. Self-employment³ includes situations where a claimant works alone as an independent worker or contractor, as well as those situations where the claimant engages in a business activity on his or her own behalf or is engaged in the operation of a business as a partnership or co-adventure⁴. Self-employment includes being engaged in the operation of a business as a corporation.⁵

Self-employment involves working and striving to achieve a profitable financial enterprise. The efforts of the self-employed person are part of what makes a business operation run. People who are not engaged in self-employment, but have only invested in a business enterprise, expect profits through the efforts of the people who are running the business, such as, a business operator, promoter or a third party who is acting on the owner's behalf. Generally, those not engaged in self-employment benefit from the results of the business operation through ownership and not through labour, work or effort on their part in achieving those results.

For self-employment to exist there must be involvement in activities which are designed to generate income from providing a product or offering a service or involvement in the managing of those individuals who attempt to generate income. As long as there is a finding that the claimant is engaged in the operation of a business, there is participation, labour or work by the claimant and moneys resulting from that self-employment are earnings for benefit purposes.⁶

The mere ownership of a business is not sufficient to warrant a finding that the claimant is self-employed. Something more than the status of a shareholder or owner is required to make a finding that the claimant is self-employed.⁷ That something is work or labour, that is, involvement or participation in the work and activities of a business. If there is no such involvement or participation, then any income received does not arise out of employment because there is no work or labour on the part of the claimant.⁸ Self-employment does not include involvement or participation that is only in the nature of exhibiting a natural concern for an investment⁹.

It is the claimant's activities, intentions and actions in the business as a whole that must be examined and not whether the claimant has participated in operating the business in a particular week or period when the business continues to operate during this period.¹⁰ Once there is a finding that the claimant is engaged in the operation of a business, any moneys arising from that business are earnings unless the claimant sells the business or permanently withdraws from its operation.

The status of claimants, who assist in a business operation, depends on whether the person is employed under a contract of service, engaged in the operation of the business as a partnership or co-adventure, or simply lending a hand due to some relationship with the business operator. The determination of the claimants' unemployed status and whether earnings are applicable depends on the particular arrangements made¹¹.

Once it has been determined claimants are self-employed on their own account or in a partnership or co-adventure, the extent of their involvement must be examined to determine whether they are working a full working week.¹² If the claimants' involvement or engagement in the operation of a business is found to be more than minor in extent¹³, a disentitlement regarding working a full working week is imposed.¹⁴ For practical purposes, self-employed earnings are only allocated when the claimants' involvement or engagement is minor in extent, even though income from all levels of self-employment activities is earnings. For claimants who are disentitled for failure to prove that they are unemployed, earnings are only allocated if the claimant subsequently establishes that the self-employment is minor in extent.

The issue of minor in extent regarding self-employment only relates to the determination of whether a claimant has worked a full working week. Once there has been a determination that the claimant is self-employed, then the claimant's share of ALL income from that self-employment is considered as earnings,¹⁵ whether or not those earnings arise from the work of the claimant or from the assets owned by the business. For the purposes of earnings for benefit purposes, earnings are considered whether the claimant is a little self-employed or a lot.

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1. R. Côté (A-178-86);
2. EIR 35(1); although regulation 30 on self-employed persons includes those persons who are employed in any other employment where they control their own working hours, information on income received by those persons is contained in 5.8.0, "Commissions" and 5.7.0, "Remuneration under a Contract of Employment";
3. see 4.6.0, "Independent workers working a full working week";
4. D. Caron Bernier (A-136-96, CUB 31814);
5. D. Laforest (A-296-86, CUB 12019) and D. Caron Bernier (A-136-96, CUB 31814); see 5.16.2, "Working for a Corporation in which Shares are Owned" and see 4.6.8, "Piercing the corporate veil";
6. see 4.6.3, "Determination of engagement or investment" and see 4.6.4, "Exception to overcome the presumption of a full working week;
7. C. Endicott (A-707-94, CUB 26138);
8. see 5.3.1.6, "Return on Investment or a Return on Capital";
9. see 5.3.1.6, "Return on Investment or Return on Capital" and see 4.6.3, "Determination of engagement or investment";
10. see 4.6.10, "Claim for special benefits";
11. see 5.16.1.1, "Assistance to a Business Enterprise";
12. EIR 30(1);
13. see 4.6.4, "Exception to overcome the presumption of a full working week";
14. EIA 11(1) and EIR 30(1);
15. this is the second "constant" as set out in D. Caron Bernier (A-136-96, CUB 31814); see 5.16.3, "The Claimant's Share of the Proceeds from Self-Employment."

5.16.1.1   Assistance to a Business Enterprise

Claimants may lend a hand in a business owned by someone they know. This does not mean that every claimant who provides some assistance in connection with a business enterprise is necessarily self-employed on his or her own account or in a partnership or co-adventure, or employed under an employer-employee relationship. The status of the claimant must be assessed in relation to the business to determine whether the claimant is an employee, owner or co-adventurer, or simply someone freely assisting another.

If the claimant is employed as an employee under a contract of service or arrangements similar to a contract of service, then the earnings provisions applicable to persons employed under a contract of service apply.¹

If the claimant is self-employed in the business on his or her own account, in a partnership or engaged in self-employment in a co-adventure², any income arising from these self-employed activities is earnings.

If a claimant is simply assisting another person, without expectation of any benefit, profit, or financial or economic advantage from the work, either immediate or eventual, and solely because of a friendship or family relationship, then there is neither an employer-employee relationship nor self-employment. If employment of any sort does not exist, there cannot be any earnings as a result of the assistance given. However, if there is any hope or promise of some sort of a financial interest in a business, the claimant may not be working totally out of disinterest³. In addition, if no employment exists, then the claimant's availability status should be explored in connection with the time that the claimant is spending in providing assistance to the business enterprise.⁴

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1. see chapter 4, "Week of Unemployment," and see 5.7.0, "Remuneration under a Contract of Service";
2. see 4.6.9, "Volunteering assistance to a business enterprise" and see 4.6.7.4, "Co-adventurer";
3. see 4.6.9, "Volunteering assistance to a business enterprise" and see 5.3.1.6, "Return on Investment or Return on Capital";
4. see chapter 10, "Availability for Work."

5.16.2    Working in a Corporation in which Shares are Owned

Income received from mere ownership of shares in a corporation is not earnings for benefit purposes if it does not arise out of employment, that is, if the claimant takes no part in the operation of the corporation.¹ However, a claimant who owns shares in a corporation may also work for that corporation as an employee under a contract of service or may be engaged in operating that corporation as a business on his or her own account² or in a co-adventure. Some claimants may be paid employees as well as perform some additional functions for which wages or salaries are not paid.

It must be ascertained when a claimant is receiving any income from a corporation, whether that income is from employment under an employer-employee relationship, from the claimant's self-employment activities in operating a business, or from an investment in that business.

Income from corporations normally is in the nature of wages or salaries, if the claimant is working for the corporation as an employee, and dividends, if the claimant owns shares in that corporation. Dividends are paid to shareholders to provide return on the shareholder's investment in the corporation. Directors of corporations decide if and when dividends are declared in a particular year. Additionally, there may be an increase in the value of the claimant's holdings in the corporation if the net income earned in a period is retained by the corporation and not distributed to shareholders as dividends. The claimant's role or roles in the corporation determine what type of income he or she receives.

Wages and salary arising out of contracts of employment with corporations are earnings for benefit purposes as they arise out of employment. The fact that shareholders may be paid wages or salaries to manage corporations, or for some reason the shareholders' employment is not insurable, does not automatically mean that he or she is not an employee.

For shareholders, who are solely employees and paid for all the work that they perform for the corporation, income from that employment under a contract of service is earnings for benefit purposes.³ For these shareholders any other income from the corporation resulting from ownership, such as, dividends and the claimants' share of the corporate net income for that period is not earnings as it does not arise out of any self-employment. The employee is compensated for all work performed as an employee through the wage or salary paid. Since the shareholder is not engaged in self-employment in operating the corporation, there are no earnings from self-employment. Any income from the shareholder's holdings in the corporation is considered income from an investment.

The situation is not the same when it is determined that shareholders are engaged in operating corporations as a business.⁴ While engaged in operating corporations as a business, shareholders may receive wages or salary from the corporation for only a portion of the hours worked or they may not be compensated as an employee for the work at all. Of course, payment for any work performed under a contract of service is earnings from employment. Whether earnings arise from the work performed without remuneration in operating the corporation must be determined.

Although, there is no provision in the legislation to attribute a value to work performed without wages or salary⁵, any income arising out of self-employment is earnings for benefit purposes⁶.

Being engaged in the operation of a business, which includes operating a corporation, falls into the category of being self-employed⁷. Any income arising from that self-employment is earnings for benefit purposes.

Claimants who are shareholders engaged in operating a business as a corporation have argued that due to the corporation's status as a separate legal entity, the net income of the corporation belongs to the corporation and cannot be considered earnings of the claimant. However, claimants who are self-employed in operating a business on their own account as a sole proprietor, or in partnership, or co-adventure have their share of the net income allocated as earnings. If the claimants' share of the net income of a corporation⁸ was not considered as earnings, it would give unfair advantage to those who choose to operate their business through the corporate form of business structure over those who do so in a partnership or as a sole proprietorship.⁹

To remove inequities in treatment due to the choice of the structure of a business, the corporate veil is pierced¹⁰ in order to consider earnings arising from self-employment activities of claimants who are engaged in the operation of a corporation. The legal status of the operation or business in which the self-employed person works is irrelevant.¹¹

When the corporate veil is pierced, the claimant's engagement in the operation of the corporation is considered self-employment and any income from that self-employment is earnings. The amount of earnings arising from that self-employment must be determined.

If there has been a determination that the claimant is self-employed, actually receiving the income is unnecessary, as the mere right to receive such income is sufficient¹². The amount of income to be allocated depends on whether the claimant is self-employed in farming or is self-employed in employment other than farming.

For those persons self-employed in farming, the income from self-employment is fifteen per cent of that farmer's gross income¹³ from farming transactions¹⁴ and any subsidies the farmer receives under any federal or provincial program¹⁵. Through the piercing of the corporate veil, the farming transactions and subsidies of the corporation become the transactions and the subsidies of the claimant. The income from being engaged in self-employment in farming through the vehicle of a corporation is fifteen percent of the claimant's share of any farming transactions made by the corporation and fifteen percent of the claimant's share of any subsidies received by the corporation.¹⁶

For those persons self-employed in employment other than farming, the income from self-employment is the amount remaining after deducting the operating expenses¹⁷, other than capital expenditures¹⁸ from the gross income from that employment¹⁹. Since the claimant only has a right to his or her share of the net income of a corporation, it is this amount that is determined as earnings for benefit purposes²⁰ when the corporate veil is pierced. The claimant's share of the corporate net income has lost its character of investment income and has become income arising from self-employment.

If there is a finding that the claimant is self-employed, the relative amount of time spent on the operation of the business is irrelevant to the amount of earnings to be determined.²¹ A claimant who is self-employed has his or her income from that self-employment determined as earnings whether he or she is working a small number of hours or a substantial number of hours. The amount of time spent is one of the six circumstances for determining whether a claimant who is self-employed or operating a business is doing so to a minor extent²² or not. However, once there has been a determination of self-employment, the amount of time spent has no relevance to the amount of earnings to be allocated.

Once it has been determined that the claimant is engaged in self-employment, all income from that self-employment is earnings. There is no provision to attribute a portion of self-employed income as arising from the investment that the claimant has made in the business.²³ This is true whether the claimant is self-employed and operating his or her business as a sole proprietorship, partnership or corporation.

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1. the person's unemployed status must still be determined; see 4.6.3, "Determination of engagement or investment" and see 5.3.1.6, "Return on Investment or Return on Capital";
2. incorporation legislation may allow a person to establish a corporation with only one shareholder; D. Laforest (A-296-86, CUB 12019);
3. determination must be made as to whether the shareholder is employed under a contract of service or is engaged in the operation of a business, see 4.6.3, "Determination of engagement or investment";
4. determination must be made as to whether the shareholder is engaged in the operation of a business, for information on how this is determined, see 4.6.0, "Independent workers working a full working week";
5. CUB 17120; EIR 35(10)(d) does not allow a value to be attributed for work performed without remuneration;
6. EIR 35(1) and EIR 35(2);
7. D. Caron Bernier (A-136-96, CUB 31814);
8. see 5.16.3, "The Claimant's Share of the Proceeds from Self-Employment";
9. D. Caron Bernier (A-136-96, CUB 31814); D. Laforest (A-296-86, CUB 12019);
10. li < Dictionary; Law injustice–Black?s an remedy to or wrong-doing, fraud, of cases in only used is It corporation. the run own who individuals corporation actions attribute and structure corporate beyond look Courts allows veil? piercing>
11. this is the first "constant" mentioned in D. Caron Bernier (A-136-96, CUB 31814); the principle is also found in D. Laforest (A-296-86, CUB 12019);
12. this is the third "constant" mentioned in D. Caron Bernier (A-136-96, CUB 31814);
13. see 5.16.3, "The Claimant's Share of the Proceeds from Self-Employment";
14. EIR 35(10)(b)(i); see 5.16.4.1, "Farming Transactions";
15. EIR 35(10)(b)(ii); see 5.16.4.2, "Federal or Provincial Farming Subsidies";
16. D. Caron Bernier (A-136-96, CUB 31814);
17. EIR 35(6)(c); see 5.16.5.1, "Deductions for Operating Expenses";
18. EIR 35(6)(c); see 5.16.5.1, "Deductions for Operating Expenses";
19. see 5.16.3, "The Claimant's Share of the Proceeds from Self-Employment";
20. P. Drouin (CUB 33274, A-348-96); see 5.16.5, "Earnings from Self-Employment in Employment Other than Farming.";
21. this is the second "constant" mentioned in D. Caron Bernier (A-136-96, CUB 31814);
22. EIR 30(2);
23. EIR 35(10)(b)  and (c); Jurisprudence Index/earnings/farming/definition/.

5.16.3    The Claimant's Share of the Proceeds from Self-Employment

The entire income arising out of self-employment is earnings. In the case of a claimant who is self-employed in farming, that income is fifteen per cent of the claimant's gross income. In the case of a claimant who is self-employed in employment other than farming, income includes the amount of the gross income from that employment remaining after deducting the operating expenses, other than capital expenditures.¹ The determination of whether a claimant is self-employed depends on whether it can be said that the claimant is engaged in the operation of a business or working as an independent worker or contractor.²

When the claimant is self-employed in operating a business with others, it is only the claimant's portion of the income from that business that is considered as earnings. In partnerships, it is the claimant's share of the income set out in the partnership agreement.³ In a corporate situation, the claimant's portion of the income of the corporation is based on the claimant's investment in the corporation, which is represented by the percentage of shares owned.

Once there is a finding that the claimant is self-employed, all income arising from that self-employment and its activities must be considered. There is no requirement in law in the determination of earnings to analyze further whether any portion of the self-employment income arose from investment, or the extent of the self-employment itself.⁴ A portion of the claimant's income from self-employment cannot be excluded from consideration as earnings on the basis that that portion of the income was earned by the investment and not the labour of the claimant.⁵ However, moneys received from investments that do not arise out of the claimant's self-employment activities and meet the criteria for investment income,⁶ are not considered to be arising out of employment.⁷

Once it has been determined that the claimant is involved in self-employment, the claimant's share of the income is based on the claimant's entitlement according to ownership or the terms of the partnership agreement regardless of the extent of the claimant's personal involvement, work, or participation.⁸

It is the claimant's share that is earnings and the claimant cannot assign any portion of the income from the self-employment to any other person unless that person has a legal right to claim a share of the income from that business.⁹ Nor can income be excluded from consideration as earnings because the claimant's share of the net income of the business is left within the business to meet present or future business obligations.

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1. EIR 35(10);
2. see 4.6.0, "Independent workers working a full working week";
3. a partnership agreement may set out a percentage under which the net profits of the partnership are to be shared which may be different than the percentage owned. In that case the claimant's share of the net income is the percentage share of the net profits and not the percentage of ownership;
4. D. Caron Bernier (A-136-96, CUB 31814); CUB 31090 and CUB 13429;
5. CUB 31090;
6. see 5.3.1.6, "Return on Investment or Return on Capital";
7. for an example, see 5.16.4, "Earnings from Self-Employment in Farming";
8. CUB 25111;
9. CUB 12219.

5.16.4    Earnings from Self-Employment in Farming

It is the entire income arising out of employment that is earnings for benefit purposes.¹ For those persons self-employed in farming, that is, who are engaged in the operation of a farm, the income to be considered as earnings is fifteen per cent of that farmer's gross income from farming transactions² and fifteen per cent of any subsidies³ received under any federal or provincial program⁴.

Advances against the sale of farm products are part of the entire income arising out of self-employment.⁵ However, allocation cannot occur until the week of the farming transaction, that is, the week in which the sale is considered to occur and not when the claimant receives the advance.⁶

It is only the income that arises from farming transactions and subsidies that is considered under the provisions for claimants who are self-employed in farming. A person who is self-employed in farming, may receive moneys more related to the ownership of land than as a result of the business of farming.⁷ Income arising from other sources, such as, renting unused land to others, selling mineral rights or receiving royalties from those mineral rights is neither a farming transaction nor a subsidy. This income results from ownership and not from self-employment in farming. The true nature of any income must be determined and handled according to whether the income is from self-employment in farming, from employment under a contract of service, from some activity other than self-employment in farming or from an investment. For instance, operating a harvesting and threshing business is self-employment in the operation of a business but is not self-employment in farming.

A percentage of gross income is fixed for farmers rather than entering into an assessment of what was a business expense as opposed to a personal expense. This is due to the difficulty in separating a farmer's personal living expenses from his or her farm business expenses.⁸

No other deduction for expenses can be allowed for those claimants who are self-employed in farming as the deduction of operating expenses only applies to those claimants who are self-employed in employment other than farming. This means that there can be no deduction for wages or salary paid to any farm worker or any other expenses associated with farming.

Any proceeds received by the farmer from a loan are not considered to be part of the entire income arising out of self-employment in farming. A loan is something that must be repaid by the borrower to the person who loaned it and is not considered to be part of income arising from employment.

Any payment as a result of business insurance purchased is not income arising out of employment.⁹

Draws by farm owners are not considered part of the income arising out of employment from self-employment in farming.¹⁰

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1. EIR 35(2);
2. see 5.16.4.1, "Farming Transactions" and 5.16.7, "A Transaction Occurs";
3. see 5.16.4.2, "Federal or Provincial Farming Subsidies";
4. EIR 35(10)(b);
5. see 5.16.7, "A Transaction Occurs";
6. see 5.16.6, "Advances and Draws";
7. see 4.6.5, "Engaged in the operation of a business as a farm";
8. CUB 20398;
9. see 5.16.4.3, "Payments under an Insurance Policy";
10. see 5.16.7, "A Transaction Occurs."

5.16.4.1   Farming Transactions

A farming transaction is a business deal or a sale that arises from farming activities.¹ A farming transaction includes the sale of all types of farm products². Farm products include crop sales, such as, grains, honey, fruit, vegetables, flowers, tobacco, wood, as well as the sale of livestock and their by-products, such as, cattle, chickens, ostriches, horses, sheep, and the products associated with them such as milk, eggs, feathers, pregnant mare's urine, and wool.³

Fifteen per cent of the gross amount of the farming transaction will be considered to be income arising out of self-employment in farming. No other deduction is allowed.

Allocation of fifteen per cent of the income from farming transactions is to the week that the completed transaction occurred⁴, no matter when the actual payment is made.

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1. According to Webster's New Collegiate Dictionary, Ninth Edition, a transaction is "something transacted; esp: a business deal";
2. for a definition of what activities are considered under farming, see 4.6.5, "Engaged in the operation of a farm as a business";
3. this is not an exhaustive list of the various farming products that farmers may offer for sale;
4. EIR 36(7); see 5.16.7, "A Transaction Occurs."

5.16.4.2   Federal or Provincial Farming Subsidies

A subsidy may be defined as a grant of money made by the government in aid of the promoters of any enterprise, work or improvement in which the government desires to participate, or which is considered a proper subject for government aid, because such purpose is likely to be of benefit to the public.¹

The definition of the word subsidy is so broad that it could include all government moneys paid to farmers with a particular goal in mind. However, it is only those moneys or advantages that are earned by labour or resemble them² that are earnings for benefit purposes. Moneys must clearly display the character of a consideration given in return for work done by the recipient³ in order to be considered earnings.As a result, only income support subsidies, intended to compensate for lost income, are considered when determining the income of a farmer.

An income support subsidy includes any subsidy that pays for differences in the price for which goods are sold and a minimum set price level for the product, that is, a price subsidy, or any subsidy that guarantees the individual's income level, an income subsidy. An income support subsidy does not include any course cost subsidies which are designed to increase the knowledge level of the farmer; any subsidy (using the widest meaning of the word) that pays a farmer "not to farm"; grants received from the government to partly absorb the cost of farming implements; nor any subsidy which is compensating for a decrease in the market value of the land.

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1. Black's Law Dictionary, Sixth Edition; CUB 27670;
2. R. Côté (A-178-86);
3. L. Vernon (A-597-94, CUB 25472) and J. Filion (A-598-94, CUB 25473).

5.16.4.3   Payments under an Insurance Policy

Insurance may be defined as a contract whereby, for a stipulated consideration, one party undertakes to compensate the other for loss on a specific subject by specified perils.¹ A farmer may purchase insurance against loss or price fluctuations of crops or livestock.

Moneys paid according to the terms of an insurance policy to cover the loss of an insured crop or livestock are paid to compensate for the loss of a business asset. These monies are not considered to be earnings arising out of employment. They are treated in the same way as any insurance payment for the loss of an asset owned by someone engaged in the operation of a business. In the same fashion, moneys paid under an insurance policy for a loss due to price fluctuations are not considered to be earnings arising out of employment. These moneys remain proceeds from an insurance policy purchased by the individual farmer and can be considered neither a farming transaction nor a subsidy.

The fact that the federal or provincial government may assist in the payment of premiums cannot change the nature of the proceeds from an insurance policy for an insured loss. Payments from an insurance policy are not in the nature of a grant² and thus cannot be considered to be a subsidy.

Additionally, the payment of a portion of the premiums by the provincial or federal government cannot be considered to be an income-support subsidy.

Proceeds from insurance policies are neither a farming transaction nor a subsidy. These moneys are treated in the same fashion as the proceeds of any insurance purchased by a claimant that is not for the loss of wages.³

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1. Black's Law Dictionary, Sixth Edition;
2. a grant is the bestowal or gift of land or money. This gift or bestowal may be given in exchange for some sort of compensation paid by the recipient. A grant may also be given conditional on the production of a service or a product;
3. the only insurance payments for lost wages that are specifically included as earnings for benefit purposes are those that are paid by automobile insurance established under a provincial law where unemployment insurance benefits are not taken into account in calculating the amount to be paid and those which arise under a group wage-loss indemnity plan.

5.16.5    Earnings from Self-Employment in Employment Other than Farming

The entire income arising from any employment is earnings.¹ Self-employment on one's own account or in a partnership or co-adventure is included in the meaning of employment.² Although it is the entire income arising from any employment that is determined to be earnings, for claimants who are self-employed in employment other than farming, income is the amount of the gross income from that employment³ remaining after deducting the operating expenses other than capital expenditures⁴, incurred therein.⁵ A deduction for expenses incurred in earning self-employed income is consistent with the approach for claimants employed under a contract of service⁶ as well as those self-employed in farming⁷.

Earnings from self-employment in employment other than farming are allocated to the week or weeks in which the services that gave rise to those earnings are performed, and where the earnings arise from a transaction, they are allocated to the week in which the transaction occurred.⁸

The prevailing principle in determining the income and expenses of a self-employed person in employment other than farming is that income should be matched with the expenses incurred in earning that income.

Payment does not have to have been made for a determination that the moneys are part of the entire income arising out of self-employment. The meaning of income includes income that is received or to be received from an employer or any other person⁹.

Any moneys received by a business as a loan are not considered to be part of the entire income arising out of employment and are not earnings for benefit purposes. A loan is just that, an amount that must be repaid. It never represents "earnings," because it must be repaid to the person who loaned it. This is true even if the loan was made from the business to one of its owners.

Moneys received as a result of business insurance purchased¹⁰ are not considered to be part of the entire income arising out of employment and are not earnings for benefit purposes.

Advances against sales or services to be performed are part of the entire income arising out of self-employment.¹¹ However, allocation is to the week of the sales transaction, that is, the week in which the sale is actually made or to the period that the services are actually performed and not to when the claimant receives the advance.¹²

The income from self-employment in employment other than farming is the amount of the gross income from that self-employment remaining after deducting the operating expenses other than capital expenditures, incurred therein.¹³ Whether the claimant removes money from the business through distributions such as, dividends,¹⁴ draws or advances,¹⁵ has no bearing on this net income to be allocated. This remains true, even if the claimant leaves all profits in the business.

The determination of self-employed earnings should be based on reliable evidence such as financial statements and a detailed account of operating expenses. Operating expenses¹⁶ must be reasonable, credible, or else substantiated.

Earnings are determined and allocated on a weekly basis since the week is the basic period used in the legislation. This includes self-employment earnings.

Where business activity varies with periods of concentrated activity creating revenue and periods of little or no activity and no revenue, operating expenses may be separated into those operating expenses which are on-going and those that relate to a particular job. This allows a more accurate match of expenses and revenue.

On-going operating expenses represent the cost of doing business and are those expenses which occur on regular or on-going basis whether income is generated or not, such as, rent, insurance, wages or salary for regular employees, licenses, property taxes, and utilities. On-going operating expenses are spread evenly over the relevant period of business operation.

Job-specific operating expenses represent the cost associated with a particular activity of the business, that is, a specific product, job, sale, or work performed. Job-specific operating expenses are costs such as, additional wages or salary for employees hired for that work, travel expenses, and materials. Job-specific operating expenses are applied to the period in which the work is performed. In the weeks where work is performed, there may be a deduction for on-going operating expenses as well as the job-specific operating expenses related to that period.

If a weekly breakdown of actual gross income and operating expenses is not possible, the income may be calculated using other methods. The method chosen should be one that most accurately matches expenses with the income that those expenses generated. These methods are used when difficulties arise in determining income and not when it is more advantageous to a claimant whose income widely fluctuates over the period of operation.¹⁷

If gross income is known on a week-by-week basis but exact operating expenses are difficult to determine, or operating expenses vary widely week to week, income may be calculated by deducting a percentage for the operating expenses. The percentage that the operating expenses absorb of the gross income may be used if such an average is known.

If the exact weekly gross income cannot be determined, an average net income based on the total gross income minus operating expenses for the applicable period may be used. This method should not be used in cases where the claimant is not engaged in self-employment for substantial time in the applicable period unless there is no information as to when the actual work was performed.¹⁸

Earnings to be reported for a particular week may be estimated by using the financial statement of the previous month. Any adjustment required would then be made on receipt of the month-end statement.

To determine whether it is services performed that are giving rise to the self-employed earnings or a transaction, the type of contractual arrangements entered into with customers or clients must be examined. The contractual arrangements of self-employment are either sales contracts or contracts for service. These contracts may be express or implied.¹⁹

A contract for service is a contract where the client or customer hires an independent businessperson to perform a specific job or piece of work where the independent businessperson retains control of the means, method and manner of accomplishing the desired results. Self-employed persons hired under a contract for service have earnings resulting from that contract allocated to the week or weeks in which the services that gave rise to those earnings are performed.

A sales contract is an agreement under which the seller agrees to convey title to property upon payment by a buyer under terms of the contract. It includes both a present sale of goods and a contract to sell goods at a future time. Self-employed persons who are engaged in selling goods or products are contracting with their customers for a product and not for performing a service. As a result, the income from the sales is allocated to the week that the transaction occurred.²⁰

When a service is provided along with the product sold and there is no breakdown of the amounts paid for each, the allocation is to the week of the transaction.

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1. EIR 35(2);
2. EIR 35(1);
3. see 5.16.3, "The Claimant's Share of the Proceeds from Self-Employment";
4. see 5.16.5.1, "Deduction for Operating Expenses";
5. EIR 35(10)(c);
6. see 5.3.3, "Expenses and Consideration";
7. see 5.16.4, "Earnings from Self-Employment in Farming";
8. EIR 36(6); see 5.16.7, "A Transaction Occurs";
9. EIR 35(1);
10. see 5.16.4.3, "Payments under an Insurance Policy";
11. see 5.16.7, "A Transaction Occurs";
12. see 5.16.6, "Advances and Draws";
13. EIR 35(10)(c);
14. see 5.16.2, "Working in a Corporation in which Shares are Owned";
15. see 5.16.6, "Advances or Draws";
16. see 5.16.5.1, "Deductions for Operating Expenses";
17. CUB 28198;
18. CUB 10761;
19. according to Black's Law Dictionary, Sixth Edition, an express contract is an actual agreement of the parties, the terms of which are openly uttered or declared at the time of making it, being stated in distinct and explicit language, either orally or in writing. An implied contract is inferred by the law as a matter of reason and justice from the act or conduct of the parties. An implied contract may arise where one party, without being requested to do so, renders services under circumstances indicating that he or she expects to be paid thereof, and the other party knowing the circumstances, avails himself of the benefit of those services. An implied contract is an agreement which legitimately can be inferred from the intention of the parties as evidenced by circumstances and ordinary course of dealing and common understanding;
20. see 5.16.7, "A Transaction Occurs."

5.16.5.1   Deductions for Operating Expenses

Expenditures made in the course of pursuing self-employment are classified as capital expenditures or operating expenses. The classification into which an expenditure falls depends on whether the expenditure is for an asset which continues to exist, and will benefit future operating periods of the business, a capital expenditure, or for an item which is used up in earning the revenue for which it was incurred, an operating expense.

Capital expenditures or balance sheet expenditures are outlays of funds to acquire or to improve assets. The assets acquired or improved benefit the business entity over one or more accounting reporting periods beyond the period of acquisition or improvement. An accounting reporting period is usually one year. The asset purchased or improved is used, or will be used, to earn not only revenue in the current reporting period, but also revenue in future reporting periods. Capital expenditures are items such as, the purchase of land, buildings, equipment including vehicles, the repayment of the principal amount on a loan, and the cost to purchase a franchise. The item acquired appears on the person or business' Balance Sheet.

An expense is an outflow or other using up of assets or the incurring of liabilities (or some combination) during an accounting period. These expenses occur from delivering or producing goods, rendering services, or carrying out other activities that constitute the business entity's on-going major or central operations. Operating expenses or revenue expenditures¹ refer to specific expenses and costs of operating a business that benefit a specific period. Operating expenses are what are used up in operating the business to obtain the revenue earned in a specific period. Operating expenses are deducted from the revenue earned during the same period of time that the expenses were incurred.

The cost for the purchase or improvement of assets, that is, capital expenditure, is not an operating expense. As a result, the total cost for the purchase or improvement of assets cannot be deducted from gross income. To allow a deduction of the entire cost of an asset from the income for a specific period when the asset will be used beyond that period would distort the match of revenue and expenses and result in a misstatement of the net income for that period. It is for this reason that the only deduction to be made from the gross income is for operating expenses.

Capital expenditures made for assets having limited lives, such as, equipment and buildings, have an operating expense associated with them. Through use of an operating expense, the cost of the capital expenditure is spread out over the estimated useful life of the asset. In this way, the cost to acquire and maintain an asset used in operating a business can be assigned throughout the entire useful life of the asset. The operating expense most often associated with fixed assets is depreciation.

Depreciation expense is used for buildings and equipment and represents the loss or reduction in value that assets purchased by an expenditure of capital incur over their useful life in earning revenue. As long as the method chosen to calculate the depreciation is credible and reasonable, it should be accepted.

Operating expenses are those costs incurred in running a business. Operating expenses vary depending on the type of business and include items, such as, rent, wages², utilities, supplies, bank charges³ and similar day-to-day expenses, as well as property, sales and other taxes paid by the business, advertising expenses, licensing fees, insurance, interest on business loans, maintenance or repair costs, lawyer and accounting fees⁴, workers' compensation assessment fees, payroll taxes, and depreciation. Entertainment expenses are also operating expenses where they are required to obtain and hold clients or customers.

The purchase of inventory⁵ is a capital expenditure and not an operating expense. However, as the inventory items are sold, the purchase price of the item sold⁶ may be deducted from the sales revenue, as may the purchase price of any item lost, stolen, damaged or destroyed.

Operating expenses include only those expenses relating to the business and not expenses incurred for personal or family reasons. Operating expenses may include costs incurred because the business is operated out of the claimant's household; however, these costs must be additional to the claimant's normal household expenses. For example, if an office, workshop, or storage area related to the claimant's self-employment is maintained in the claimant's residence, deduction for expenses related to that office workshop or storage area may be made. However, a household telephone used for business purposes is an additional expense only if a higher rental rate results from using it for business purposes, or if there are long-distance or toll calls attributable to the business.

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1. Black's Law Dictionary defines operating expenses as the cost of operating a business, such as rent, wages, utilities, and similar day to day expenses, as well as taxes, insurance, and a reserve for depreciation;
2. this includes wages or salary paid to family members;
3. those bank charges applicable to the business are operating expenses. However, if the claimant is using a personal chequing account with a flat monthly service fee to pay business expenses along with personal ones, this is not an operating expense;
4. unless these amounts are part of the start-up costs of a business, in which case they are a capital expenditure;
5. an inventory is goods held for sale or lease, raw materials, work in progress or materials consumed in a business; in accounting inventory can also refer to the segment of financial statements reflecting the value of the businesses raw materials, work in progress, and finished goods;
6. this may appear on financial statements as "cost of goods sold."

5.16.6    Advances or Draws

Income may be received from customers or clients as deposits or advance payment on services to be rendered, items to be provided, or sales to be made. These payments represent earnings for benefit purposes. Their allocation is to the period in which the services are actually rendered. If the payment results from a transaction, the allocation is to the week in which the transaction occurs¹, that is, when ownership of the item that is sold transfers to the customer.²

A business operator may receive an advance from the business on the wages or salary that is due to him or her, or on the business operator's share of the profits. A company, marketing board may also pay advances based on anticipated sale of products. An advance may be defined as money paid before it is due or a loan.

An advance is a payment for a something before entitlement to that payment is earned, such as, an advance on wages or salary; an advance on commissions before the right to them has occurred; an advance on sales or services before the right to that payment exists under the terms of the sales contract; and an advance taken by business owners on their share of the net income of the business. Advances must be repaid. Normally, the repayment of the advanced amount occurs when the product is sold the wage, salary, commission or share of the profits is earned and payable. If the right to the expected payment does not occur, the person who receives the advance must repay it.

Advances on wages, salary, commissions, sales or profits are earnings and are allocated to the periods in which they are earned and not when the advance is paid. In the case of an advance against wages or salary, the amount advanced is allocated to the period the work is or will be performed. In the case of commissions, the amount is allocated to the period in which the services that earned the commissions are or will be performed and where there are no services as such, these moneys are allocated to the week in which the transaction that gave rise to the commission occurred.³ An advance against sales is allocated to the period that the actual sales occurred.

The situation is slightly different for when an advance against the business profits is received. Earnings from self-employment are the amount of the gross income from that employment remaining after deducting the operating expenses. The claimant should be declaring this net income as it is earned by the business and not when the claimant is to receive his or her share of the net income. Rather than considering the advance as part of the gross income of the claimant, we consider the claimant's share of the net income that business earned during the relevant period, whether the claimant is receives his or her share or not.⁴

Like a loan or advance, a draw is not part of the claimant's gross income. A draw by a business owner is a lawful withdrawal of an amount from the business against the equity that business owner holds in the business. Rather than considering the draw as part of the gross income of the claimant, we consider the claimant's share of the net income that business earned during the relevant period, whether the claimant is receives his or her share or not.⁵

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1. EIR 36(6) for self-employment in employment other than farming; EIR 36(7) for self-employment in farming;
2. see 5.16.7, "A Transaction Occurs";
3. see 5.8.0, "Commissions";
4. D. Caron Bernier (A-136-96, CUB 31814);
5. D. Caron Bernier (A-136-96, CUB 31814).

5.16.7    A Transaction Occurs

A transaction occurs when a sale is considered complete, that is, when the buyer purchases the product and a right to payment for that product exists. It does not matter whether the payment for the transaction is immediate or deferred. This applies to all transactions arising from self-employment, including farming transactions.

It is the terms of the sales contract that determines when ownership is transferred and the sales transaction is complete. A transaction may occur on payment of a deposit or the full price for the item, or only upon on delivery of the product to the customer. A transaction also occurs when a customer who backs out of a deal forfeits a deposit.

A transaction occurs when a claimant delivers a product and receives a payment¹ that is immediately negotiable. A transaction also occurs in the week that delivery is made where the claimant agrees to defer payment for the product to a later date. Even if a payment is deferred, the product is still sold and the transaction complete as the product no longer belongs to the claimant.

Deliveries made to a company, marketing-type board or agency may result in a set price for the product delivered. If the final price obtained for this product is greater than the initial price paid by the board or agency, the claimant receives the difference. The transaction occurs when the initial sale or delivery is made. Any subsequent payment based on the difference in price is allocated to the week that the original delivery was made and the product purchased by the marketing board.

A transaction does not occur when a person delivers a product to a company, board, or agency for later sale when market conditions are most favourable. It is not considered to be a sale or a transaction if the item is just delivered to a company, marketing board or storage agency, and no payment for the product is received, and a receipt or a storage ticket² is issued.

A transaction does not occur if a claimant holds products awaiting a more favourable price or delivers products for later sale and receives an advance³ against the amount to be received when the products are finally sold. This advance cannot be called a transaction as no sale or purchase has occurred and may never occur. This type of payment is in the nature of a loan that the claimant must repay out of the sale of the product when it is finally sold. A loan that is received by a claimant is not earnings for benefit purposes as it is not income arising out of employment. A loan must be repaid. However, a transaction occurs in the week of the sale of the product if and when that sale ever occurs.

If the claimant receives payment from a company, marketing board or agency representing an estimate of the amount of his or her products sold over a specific period, and if the exact dates of the sales are not available or cannot be reasonably ascertained, the transaction may be considered to occur when the payment is made. If sales of the claimant's product by the board or agency occur in every week of the period covered by the payment, the payment representing sales transactions may be averaged over the period.

If a claimant is engaged in producing a product which is delivered daily in varying amounts and payments for the product is received at regular intervals without an weekly breakdown of the sales figures, the payment may be spread evenly over the period when the actual sales transactions were made.

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1. this includes cash tickets issued to farmers. A cash ticket is a negotiable instrument and is considered to be the same as the receipt of cash or a cheque;
2. a storage ticket is a receipt issued to the farmer recording the amount, type, and quantity of grain accepted for storage;
3. see 5.16.5, "Earnings from Self-Employment Activities in Employment Other than Farming."

5.16.8    Flow Chart / The Determination Process and Regulation 30
5.16.9   Flow Chart / Determining Whether Engaged in the Operation of a Business