Under section 5(2)(b) of the Employment Insurance Act, a shareholder-employee who controls more than 40% of a corporation's voting shares is automatically excluded from insurable employment. This EI exempt shareholder 40% rule means neither the shareholder nor the corporation pays EI premiums on that salary, but the trade-off is that the shareholder cannot claim EI benefits either.
If you are an incorporated business owner who pays yourself a salary, this single rule could mean you have been remitting Employment Insurance premiums you never owed. Many owner-managers do not realize the EI exempt shareholder 40 threshold exists until an accountant or lawyer points it out, often after years of unnecessary deductions. This explainer walks through exactly how the rule works, the separate non-arm's-length rule that catches family businesses, why CPP still applies, and what to do if you have been paying premiums in error.
What Is Insurable Employment?
EI premiums are only required on what the law calls "insurable employment." Most jobs in Canada fall into this category. EI premiums are deducted from an employee's wages and matched by the employer, and in exchange the employee builds eligibility for EI benefits if they lose their job or take qualifying leave.
The Employment Insurance Act also lists categories of employment that are specifically excluded, meaning no premiums are owed and no benefits accrue. The greater-than-40% shareholder rule is one of these excluded categories. So when business owners ask "do shareholders pay EI in Canada," the honest answer is: it depends entirely on how much voting control they hold and how they are related to the people who control the corporation. The Canada Revenue Agency (CRA) administers the rules that determine whether any given employment is pensionable for CPP and insurable for EI.
The EI Exempt Shareholder 40% Rule: Section 5(2)(b) Explained
The core rule is short. Section 5(2)(b) of the Employment Insurance Act excludes from insurable employment:
"the employment of a person by a corporation if the person controls more than 40% of the voting shares of the corporation."
In plain language, if you own more than 40% of the voting shares of the company that employs you, your employment with that company is simply not insurable. A few details matter a great deal here.
The threshold is strictly more than 40%. Someone who holds exactly 40% of the voting shares is not exempt. They remain in insurable employment and EI premiums must be remitted. The controlling shareholder EI exemption only kicks in above the 40% line.
The test is voting shares, not total shares or economic value. Non-voting preferred shares do not count toward the threshold. A shareholder could hold a large economic interest through non-voting shares and still fall below the 40% voting threshold, which means they would remain in EI insurable employment. It is the voting control that the statute targets.
The rule is automatic. There is no application, no form to file, and no ministerial discretion. If more than 40% voting control exists, the EI exempt shareholder 40% rule applies on its own. Both the corporation and the shareholder owe nothing in EI premiums on that salary.
A simple example helps. Jane owns 60% of the voting shares of her corporation and draws a salary from it. Her salary is not EI insurable employment, so neither Jane nor her corporation owes EI premiums on it. Compare that to Tom, who owns 35% of the voting shares of his employer. Tom is not within section 5(2)(b). Absent any other exclusion, his employment is insurable and EI premiums must be deducted and matched as usual.
The Trade-Off: No Premiums, No Benefits
Skipping EI premiums sounds like a clean win, and on cash flow it is. But the rule cuts both ways. Because the employment is non-insurable, the shareholder-employee cannot collect EI benefits. That includes regular job-loss benefits, maternity and parental benefits, sickness benefits, compassionate care benefits, and family caregiver benefits.
This matters most for owner-managers who quietly assume EI will be a safety net if the business closes or if they need an extended leave. Under the EI exempt shareholder 40% rule, that safety net is not there, because no insurable employment was ever created.
There is one partial workaround. Self-employed individuals and excluded shareholder-employees can voluntarily register with the Canada Employment Insurance Commission, through Service Canada, to access EI special benefits. If they opt in, they generally must pay premiums for at least 12 months before making a claim, they pay only the employee portion of the premium rather than both portions, and they gain access only to special benefits such as maternity, parental, sickness, and compassionate care benefits. Regular job-loss benefits are not available through this voluntary route. This program is administered by Service Canada rather than CRA, and the terms can change, so confirm the current requirements before relying on it.
The Non-Arm's-Length Rule: A Separate and Rebuttable Exclusion
The 40% rule is not the only way a worker connected to a closely held corporation can end up outside insurable employment. A second and frequently overlapping rule deals with non-arm's-length employment for EI purposes, and it is easy to confuse the two.
Under section 5(2)(i) of the Employment Insurance Act, non-arm's-length employment is also excluded from insurable employment, regardless of share ownership. "Non-arm's-length" follows the Income Tax Act (Canada) meaning, so related persons connected by blood, marriage, common-law partnership, or adoption are deemed not to deal at arm's length, as are certain corporate relationships. CRA applies these concepts when ruling on a family member's employment.
This is where family businesses get tripped up. Consider a spouse who owns more than 60% of the voting shares and is therefore already exempt under section 5(2)(b). If that owner hires their partner, who holds no shares at all, the working partner's salary is still caught, this time under the non-arm's-length employment EI rule, because the two are related and dealing on non-arm's-length terms. The two exclusions operate independently. A shareholder who holds only 30% of the voting shares, below the 40% line, may still be non-insurable if they are a family member of the controlling shareholder.
The important difference is that the non-arm's-length exclusion is rebuttable, while the EI exempt shareholder 40% rule is absolute. Section 5(3) of the Employment Insurance Act gives the Minister of National Revenue discretion to deem non-arm's-length employment insurable. If the Minister is satisfied that, having regard to all the circumstances, including the remuneration paid, the terms and conditions of the employment, the duration of the employment, and the nature and importance of the work performed, it is reasonable to conclude that the parties would have entered into a substantially similar contract had they been dealing at arm's length, the employment can be treated as insurable.
In practice, this means a genuine family employment arrangement can qualify if it looks like a real job: a fair market salary, defined duties, regular hours, and documented terms. The 40% rule, by contrast, has no such override. More than 40% voting control means non-insurable, full stop. If your ownership and family structure is complex, this is exactly the kind of question our Toronto corporate lawyers and tax team work through with owner-managers regularly.
CPP Still Applies: The Key Distinction
Here is the misconception that costs people the most confidence: an EI exemption is not a CPP exemption. The Canada Pension Plan has no equivalent of section 5(2)(b). There is no voting-share ownership threshold that removes a shareholder-employee from pensionable employment.
If a shareholder-employee draws a salary, that salary is pensionable employment income. CPP contributions are owed by both the employee and the corporation on that salary, no matter how many voting shares the owner controls. The EI insurable employment exclusion changes nothing about CPP.
Dividends are treated differently. Dividends are not employment income, so they do not attract CPP contributions. This is one of the structural reasons owner-managers think carefully about how they pay themselves, because salary and dividends carry different EI, CPP, income tax, and retirement-savings consequences. The mix that is right for one business owner is wrong for another, and the analysis goes well beyond EI and CPP into income tax planning, RRSP room, and long-term retirement strategy. We do not make a one-size recommendation here. If you are weighing salary against dividends, speak with our Toronto corporate tax lawyers before you set your compensation for the year. For a broader look at structuring ownership through a holding entity, see our guide on setting up a holding corporation in Ontario.
What If Premiums Have Been Wrongly Deducted?
Owner-managers often discover the EI exempt shareholder 40% rule only after years of remitting EI on salary they never needed to insure. The good news is that overpaid premiums can usually be recovered.
Where EI premiums were deducted in error because the corporation did not realize the more-than-40% exemption applied, a refund of the overpaid employee premiums can be claimed on the individual's income tax return, typically by reporting the overpayment when the return is filed. Refunds are generally available for the most recent three tax years, and the employer portion can be recovered using Form PD24 (Application for a Refund of Overdeducted CPP Contributions or EI Premiums), so acting promptly matters. The corporation may also be able to recover the employer portion of premiums it remitted in error. Because the refund mechanism and time limits depend on the specific returns involved, it is worth confirming the correct process for your situation with a tax professional before filing.
How to Request a CRA Ruling: The CPT1 Form
When it is genuinely unclear whether employment is insurable, either the worker or the employer can ask CRA to decide. The request is made using Form CPT1, "Request for a CPP/EI Ruling - Employee or Self-Employed?"
A CPT1 ruling settles both questions at once: whether the employment is insurable for EI and whether it is pensionable for CPP. The worker, the payer, or an authorized representative can request a ruling, and the request is submitted to CRA. CRA reviews the relevant facts of the working relationship and issues a written ruling. That ruling is binding on the parties unless it is appealed within the prescribed time. For a closely held corporation with overlapping share ownership and family relationships, a CPT1 ruling can replace guesswork with a clear, documented answer.
A Note on Quebec
Employment Insurance is a federal program, so the rules described above apply the same way across the provinces. Quebec is the exception worth flagging: it operates the Quebec Parental Insurance Plan (QPIP) separately for maternity, paternity, parental, and adoption benefits. Owner-managers in Quebec should treat that as a distinct regime. This article addresses the federal EI Act and does not cover the QPIP rules.
Frequently Asked Questions
Do shareholders have to pay EI in Canada?
Not always. A shareholder who controls more than 40% of a corporation's voting shares is excluded from EI insurable employment under section 5(2)(b) of the Employment Insurance Act, so no EI premiums are owed on that salary. Shareholders below that threshold are generally in insurable employment unless another exclusion applies, such as the non-arm's-length rule.
Can a business owner claim EI in Canada?
Not on excluded employment. If your employment is non-insurable because of the EI exempt shareholder 40% rule, you cannot claim regular EI benefits. You may, however, voluntarily register through Service Canada for EI special benefits such as maternity, parental, sickness, and compassionate care, subject to a waiting period and premium requirements.
Is a spouse's employment in a family business insurable for EI?
Often it is not, because non-arm's-length employment is excluded under section 5(2)(i) of the Employment Insurance Act. However, section 5(3) lets the Minister deem it insurable if the terms genuinely resemble what arm's-length parties would have agreed to. The distinction between a director and a shareholder can also affect how a family member's role is characterized.
Do you pay CPP if you are a shareholder?
Yes. CPP has no equivalent of the EI exempt shareholder 40% rule. Salary paid to a shareholder-employee is pensionable, so both the employee and the corporation owe CPP contributions on it regardless of voting share ownership. Dividends, by contrast, are not employment income and do not attract CPP.
How do I request a CRA ruling on EI insurability?
File Form CPT1, "Request for a CPP/EI Ruling - Employee or Self-Employed?", with CRA. Either the worker or the employer can submit it. CRA reviews the facts of the employment relationship and issues a binding written ruling on whether the employment is insurable for EI and pensionable for CPP. The ruling protects both parties from future reassessment on the same facts.
Sources and Official Resources
Federal Statutes Cited
- Employment Insurance Act, SC 1996, c 23, s 5(2)(b) - Excluded insurable employment
- Employment Insurance Act, SC 1996, c 23, s 5(2)(i) and s 5(3) - Non-arm's length employment
CRA Forms and Rulings
- Form CPT1 - Request for a CPP/EI Ruling: Employee or Self-Employed?
- Form PD24 - Application for a Refund of Overdeducted CPP Contributions or EI Premiums
- CRA - CPP and EI Rulings
Helpful Government Resources
- EI special benefits for self-employed people - Canada.ca
- Quebec Parental Insurance Plan (QPIP) - Canada.ca
Contact Hadri Law
If you are an incorporated business owner and you are not sure whether your salary is correctly structured for EI and CPP, or you are facing a CRA ruling request, a refund of premiums paid in error, or a payroll compliance question, Hadri Law can help you sort it out. Our tax and corporate teams advise owner-managers on exactly these issues every day.
Book a free consultation at (437) 974-2374 or through our online booking page. We serve clients in English, French, Spanish, and Catalan.
This article is general information, not legal advice. Employment Insurance and tax rules can change and depend on your specific circumstances. Please consult a lawyer or tax adviser about your situation before acting.
