EI for owner managers: over 40% of the votes means no EI premiums

Who on the payroll is excluded from EI?

Two rules in section 5(2) of the Employment Insurance Act take an owner manager or a family member out of insurable employment. Paragraph 5(2)(b) excludes employment by a corporation of a person who controls more than 40% of its voting shares. Paragraph 5(2)(i) excludes employment where the employer and employee aren't dealing at arm's length laws-lois.justice.gc.ca.

The CRA lists the same two situations as the ones where employment isn't insurable. Its own example has Martin and Nadia, who each own 50% of Garage MNO Inc. and draw a fixed salary with vacation and health benefits. Their employment still isn't insurable, because each controls more than 40% of the voting shares canada.ca. Normal employee terms don't rescue a controlling shareholder.

How the related person test works for family members

Section 5(3)(a) sends you to the Income Tax Act to decide whether people deal at arm's length, and related persons are deemed not to. Section 5(3)(b) then reverses the result if the Minister is satisfied that, given all the circumstances, an arm's length employer and employee would reasonably have entered into a substantially similar contract of employment laws-lois.justice.gc.ca.

Related means connected by blood (parent and child, brother and sister), marriage, common law partnership or adoption. Aunts, uncles, nieces, nephews and cousins aren't related by blood. An employee is related to the corporation when they're related to the person who controls it, or are a member of a related group that controls it canada.ca. So the owner's spouse can hold no shares at all and still fall under 5(2)(i).

The CRA weighs four factors together, and no single one decides the question: remuneration, terms and conditions, duration of the work, and the nature and importance of the work canada.ca. Pay well out of line with comparable employees, hours unlike the rest of the business, or a job that's accessory to the business all point to non arm's length dealing.

Unrelated people can also fail the test, because for them arm's length is a question of fact. For shareholder employees, the CRA flags substantial personal guarantees, unrestricted signing authority on the corporate bank account, undocumented loans to the corporation, and corporate use of personal assets without fair rent canada.ca. Three unrelated owners at a third each aren't caught by the 40% rule, but those facts can still exclude them.

Worked example: EI deducted in error for a 50% owner

When employment isn't insurable, you don't deduct EI, and the employer's share disappears with it, because the employer pays 1.4 times the premiums it deducts canada.ca. Many small corporations set the owner up like any other employee and deduct EI anyway.

Your client owns 50% of the voting shares and was paid $90,000 a year from 2023 to 2025, with EI deducted at the maximum each year. The maximums come from the CRA's rate table canada.ca.

The employee side is a mandatory refund under section 96(1): a person who paid premiums in a year they weren't in insurable employment gets them back on a written application within three years after the end of that year. The employer side falls under section 96(3), where the Minister may refund an amount that shouldn't have been paid, again within three years laws-lois.justice.gc.ca. As of October 2026, 2023 is the oldest open year and its window closes December 31, 2026. 2022 is gone.

For 2026 and later, stopping the deductions saves $1,123.07 of employee premium and $1,572.30 of employer premium at the current maximum, $2,695.37 a year. The details of those figures are on EI max 2026.

Does CPP still apply, and how are the T4 and refunds handled?

The 40% rule is in the EI Act only. The Canada Pension Plan's list of excepted employment has no shareholder exclusion and no general arm's length exclusion laws-lois.justice.gc.ca. Keep deducting CPP on the owner manager's salary as usual; the figures are on CPP max 2026.

There's one CPP exception for family: employment by a spouse or common law partner is excepted when the pay can't be deducted under the Income Tax Act laws-lois.justice.gc.ca. The CRA tells you to deduct CPP and income tax for a related employee as for anyone else, apart from that case canada.ca.

On the T4, report employment income in box 14, pensionable earnings in box 26, and tick box 28 to show the earnings are exempt from EI. Box 24 stays empty when the employment isn't insurable canada.ca.

To recover premiums once employment is ruled not insurable, the worker uses line 45000 of the T1 (line 44800 for CPP) or asks for a change to the return, attaching the ruling letter. The employer claims its share on Form PD24 canada.ca. PD24 is the application for a refund of overdeducted CPP or EI canada.ca.

When to ask the CRA for a CPP/EI ruling

Get a ruling when the answer isn't obvious: an owner at exactly 40%, a family member whose terms look like everyone else's, or shares held through a holding company or a trust. The Act's word is "controls", not "owns", and the CRA pages above don't spell out how indirect holdings count. A ruling settles it for the periods it covers.

An employer, an employee or a person claiming to be either can request one laws-lois.justice.gc.ca. The CRA's deadline is June 29 of the year after the year the question relates to, so a ruling on 2025 employment had to be requested by June 29, 2026, and 2026 employment has until June 29, 2027 canada.ca. That window is much shorter than the three year refund window.

Request it through My Business Account (payers), My Account (workers or payers), Represent a Client (an authorized representative), or by letter or Form CPT1 mailed to the CPP/EI Rulings Division canada.ca. Form CPT1 is completed by the worker, the payer or an authorized representative canada.ca.

The appeal deadlines come from sections 91 and 103, and the Tax Court of Canada can extend the second one on an application made within a further 90 days laws-lois.justice.gc.ca laws-lois.justice.gc.ca. Unless a ruling is appealed, it's final canada.ca.

Can an owner over 40% opt in to EI special benefits?

An excluded owner can still buy EI coverage. A person who controls more than 40% of the voting shares can register with the Canada Employment Insurance Commission the same way a sole proprietor does canada.ca. The agreement covers six special benefits only: maternity, parental, sickness (up to 26 weeks), family caregiver for children, family caregiver for adults, and compassionate care. Quebec residents get maternity, paternity, parental and adoption benefits from the Québec Parental Insurance Plan instead canada.ca.

For 2026 the premium is $1.63 per $100 up to $1,123.07, or $1.30 per $100 up to $895.70 in Quebec, paid with the T1 on Schedule 13 canada.ca. There's no employer share. Dividends don't count as eligible earnings, so an owner paid only in dividends has nothing to insure canada.ca. That's one more input to salary vs dividends. The claim conditions and the exit rules are on EI max 2026.