Employer restructuring / Succession of employers

This document provides information on the legislative changes to the Canada Pension Plan (CPP) and to the Employment Insurance Act (EIA) dealing with employer restructuring and succession of employers.

• Introduction
• Background
• Succession of employers
• Explanations
• Self-employment succeeded by employment
• Employment succeeded by self-employment
• How to apply the legislation  -  Examples
• Requesting a ruling
• For more information
• Legislative references

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Introduction

The Budget Implementation Act, 2004 (Bill C - 30) tabled in Parliament on March 23, 2004, included amendments to the CPP and the EIA. In particular, were amendments that consider a person's employment to be continuous when changes in the business structure of the employer result in a new employer.

Background

Previously, when an employer restructured, employees were treated as if they had joined a new employer. This would often occur as a result of a winding-up and immediate reconstruction under a different legal structure, or when one employer acquired a major or distinct part of another employer's property or business (e.g., a distinct division of a business was sold to another enterprise). As a result, the "new" employer had to begin withholding CPP contributions and EI premiums again, and making employer contributions, without considering the amounts withheld by the "previous" employer.

Succession of employers

Subsection 9(2) of the CPP and section 82.1 of the EIA deal with employer restructuring and in particular with succession of employers. A successor employer can consider an employee's employment to be continuous when there has been a change in the business structure of the employer.

The legislation concerning the succession of employers found in subsection 9(2) of the CPP and section 82.1 of the EIA can be summarized as follows:

Explanations

Here are four explanations that will provide you with a better understanding of the interpretation of subsection 9(2) of the CPP and section 82.1 of the EIA.

What does "with the agreement of the former employer" mean?
The phrase "with the agreement of the former employer" refers to the contractual agreement that describes the terms and conditions for the successor employer to acquire all or part of the business of the former employer.

What does "by operation of law" mean?
The phrase "by operation of law" refers to the situation where a federal or provincial statute enables assets and employees to be transferred from one legal entity to another.

For an example of an employer restructuring "by operation of law," see Example 6.

What does "immediately succeeds" mean?
The phrase "immediately succeeds" means that the employment of one or more of the former employer's employees continues with the successor employer. In other words, the successor employer is taking over the employment contracts of these employees as part of the overall contractual agreement between the successor employer and the former employer or, the successor employer is taking over the employment contracts of these employees "by operation of law."

Immediately succeeds does not necessarily mean that the employee has to report to work for the successor employer the very next day after the restructuring. A reasonable delay would be acceptable depending on the circumstances of the particular file.

For an example of an employer who "immediately succeeds" another employer please see Example 5.

What does "the acquisition of all or part of a business" mean?
This refers to situations where a successor employer acquires all or part of the former employer's business assets (capital or intangible assets) that can reasonably be regarded as necessary for the successor employer to be capable of carrying on the business.

For an example of an employer acquiring all or part of a former employer's business, see Example 3 and Example 4.

Note: It is our position that to meet this particular requirement, the successor employer has to acquire all or part of the former employer's business assets, tangible or not. For example, in the context of a corporate reorganization, we will consider that a successor employer will have acquired "all or part of the business" even if the agreement only provides for the transfer of the staff from the former employer to the successor employer.

Self-employment succeeded by employment

Subsection 9(3) of the CPP entitled "Self-employed succeeded by employment" can be summarized as follows:

Contributory self-employed earnings are defined in section 13 of the CPP.

Employment succeeded by self-employment

Subsection 10(2) of the CPP entitled "Employment succeeded by self-employment" can be summarized as follows:

Contributory salary and wages is defined in section 12 of the CPP.

What does "controlled by that person" mean?
The phrase "controlled by that person" usually refers to the situation where that individual controls more than 50% of the voting shares of the corporation in question.

For an example of an employer restructuring involving a corporation "controlled by that person," see Example 1.

How to apply the legislation  -  Examples

Example 1  -  Formation of a corporation

A proprietor operating a business with several employees decides to incorporate during a year after 2003. The proprietor transfers all the business assets to the corporation, which he controls, and the corporation employs these same workers. Three months later, the corporation hires an additional employee.

• The corporation may consider the amount of CPP contributions and EI premiums previously withheld during the year for the employees who were previously employed by the proprietor.
• For the additional employee hired a few months later, the corporation will not be able to consider the amount of CPP contributions and/or EI premiums previously withheld during the year by the previous employer, since there was no formation, dissolution, or acquisition between the corporation and the previous employer of the last employee hired.
• This corporation controlled by the former proprietor may also:
  • consider the former proprietor's contributory self-employed earnings in the year as his or her contributory salary and wages paid by the corporation in that year; and
  • consider one half of the former proprietor's CPP contributions on self-employed earnings in the year as an amount deducted, remitted, or contributed in relation to his or her contributions for that year, and the other half as an amount remitted or contributed in relation to the employer's contributions for that year.

Example 2  -  Dissolution of a corporation

In a year after 2003, the shareholders of a corporation decide that it is in their best interest to dissolve the corporate charter and to reincorporate as a new legal identity. It is decided that the new corporation will immediately employ the same workers previously employed by the former corporation whose charter has now been dissolved. All of the former corporation's assets are transferred to the new corporation.

• The new corporation would be able to consider the amounts of CPP contributions and/or EI premiums paid, deducted, and remitted previously in that year by the former employer, since it immediately succeeded the former corporation as the employer of the employees in question and acquired all of the business assets of the former employer.

Example 3  -  Acquisition of all or part of a business

Company A sells its property management division to Company B during a year after 2003. Company B hires 80% of the employees that were employed in Company A's property management division. Company B immediately succeeds Company A as the employer of the employees who are part of the 80%.

• Company B would be able to consider the amount of CPP contributions and/or EI premiums previously paid, deducted, and remitted by Company A during that year when calculating the CPP contributions and EI premiums to be deducted from the remuneration paid to these employees.

Example 4  -  Acquisition of all or part of a business

Company A owns 100% of Company B. On June 1, 2006, Company A transfers all of its employees to Company B. In the transfer agreement between the two companies, Company B is required to honour all the contractual agreements that were in place between Company A and its former employees who are now employees of Company B. The transferred employees are now performing the same function with Company B as they had been performing previously with Company A. On May 31, 2006, these employees were reporting to work for Company A, and as of June 1, 2006, they started reporting to work for Company B. There was no other transfer of assets between the two companies.

• Company B has met the conditions of subsection 9(2) of the CPP and section 82.1 of the EIA.
• The transfer of all the employees from Company A to Company B was with the agreement of the former employer.
• The successor employer (Company B) immediately succeeded the former employer (Company A) as the employer of the employees transferred.

Example 5  -  Immediately succeeds

In a year after 2003, Company B, desiring to expand its operation from solely that of a wholesaler, decides to acquire two retail outlets from Company A. Following the acquisition of these two retail outlets, Company B becomes the successor employer to 10 employees previously employed with Company A and Company B spends a short period of time remodelling the two retail outlets before they are reopened. The transfer of these 10 employees from Company A to Company B is part of the transaction, even though their actual work with Company B was delayed a short time to enable company B to complete the renovations.

• Company B can take into consideration the amount of CPP contributions and EI premiums previously withheld during the year on the 10 employees that were previously employed with Company A.
• Company B acquired part of a business from the former employer (Company A).
• Company B immediately succeeded Company A as the employer of these 10 employees even though their actual work with Company B may have been delayed a short period of time to allow for the renovations.

Example 6  -  By operation of law

In a year after 2003, a province makes amendments to its Electricity Act. The amendments require that any provincial or municipal entity engaged in producing and/or distributing hydro electricity within that province must incorporate under the provisions of the Electricity Act by June 1 of that year. The Electricity Act provides the authority for issuing corporate charters. The provincial and municipal entities were previously incorporated under the authority of other provincial legislation. These entities transferred all their employees, as well as most of their production and distribution related assets, to the corporations newly incorporated under the authority of the Electricity Act.

These new corporations would be able to consider the amount of CPP contributions and/or EI premiums paid, deducted, and remitted previously during the year by the former employers because:

• each new corporation is a result of a formation of a corporation;
• the successor employer acquired all of the business of the former employer; and
• it was by operation of law.

Example 7  -  Conditions of the legislation not fulfilled

Company A and Company B are the two most important firms operating in a very competitive market. During 2006, Company A wants to increase its market share, hires some of Company B's sales staff (without consulting Company B). Company A has not met the conditions of subsection 9(2) of the CPP or section 82.1 of the EIA and, therefore, may not take into consideration the amount of CPP contributions or EIA premiums previously deducted, remitted, or paid by Company B in 2006 for the new-hired employees.

Requesting a ruling

If you are not sure whether CPP contributions and/or EI premiums are payable in a particular restructuring or succession of employers situation, you can ask the Canada Revenue Agency (CRA) for a ruling. For more information, see the document called How to obtain a ruling for Canada Pension Plan and Employment Insurance purposes.

For more information

To get more information, call 1-800-959-5525.

Legislative references

• Canada Pension Plan
  • Sections 8, 9, 10, and 21
  • Subsections 8(1), 9(2), 9(3), and 10(2)
  • Paragraph 6(1)(a)
    
    
• Employment Insurance Act
  • Sections 82 and 82.1
  • Paragraph 5(1)(a)