EI Benefits for Business Owners - How They Work

In this article we’ll look at employment insurance benefits and how they relate to corporate or self-employed business owners.  

• Do business owners need to contribute to employment insurance?
• Should business owners contribute to EI if they have the choice to do so?
• Can business owners claim employment insurance benefits?

These are important questions, especially for business owners who may want to collect maternity or parental benefits.  

After reading this article you’ll know how it all works, what to watch out for, and you’ll be able to make an informed decision about EI benefits as a business owner.

🎥 If you would rather see Joe talk through this topic, check out the video below 👇

Non-Arm’s-Length Employee (Owner / Employee)

There is some complex language and many different potential scenarios that go along with this topic. 

However, we’re going to stick to the main points using the most common scenario that we see. 

• A corporate business owner who owns more than 40% of the company,
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  AND
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• Who is also an employee of that company.

This corporate business owner-slash-employee may be determined “not to be dealing at arm’s-length” with the company.

What Does Non-Arm’s-Length Mean?

Generally speaking, non-arm’s-length means that the owner is so connected to the company that he or she is not really like a regular employee.  

For example, an owner of a company could pretty much set whatever she wants as her salary. 

An arm’s-length employee would have to negotiate their pay, but the final decision wouldn’t really be up to that employee.

Why Does Arm’s-length vs Non-Arm's-Length Matter?

For this topic, being considered a non-arm’s-length employee matters because a non-arm's-length employee may not be entitled to employment insurance benefits in the same way that a regular employee would be.

It also means that the non-arm's-length employee wouldn’t have EI deductions withheld from her paycheck like we would typically see.

So we have a bit of a trade off in the non-arm’s-length situation:

• Pro - There are no EI deductions from this employee’s pay so there is less expense for the company and more pay for the owner / employee.
• Con - The owner / employee doesn’t get to collect unemployment benefits if the business goes under. They also can’t collect maternity or parental benefits.

EI Options for Business Owners

The good news is that these non-arm's-length employees have a choice.

1. They can carry on as an employee who is not eligible for employment insurance benefits
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   OR
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2. They can register for EI Special benefits

I’ll explain these options in detail next, and then we’ll look at when you might choose one option over the other.

A quick note here that this applies to self-employed individuals as well as the corporate owner-slash-employee that we’re using as an example.

Business Owner Without EI Benefits

The first situation is the most common one that we see and is also the simplest.

The non-arm’s-length business owner carries on as an employee without being registered for employment insurance benefits of any kind.

The business owner doesn’t really have to do anything except make sure that they are set as “EI Exempt” in their payroll software.

They get to save a bit of money personally by avoiding approximately $950 of EI deductions each year.

The company also gets to save some money by keeping the employer’s portion of EI deductions which is about $1,330 annually.

If the business owner in this example wants to go on maternity or parental leave, they wouldn’t be eligible for EI benefits.

If the business goes under and they lose their employment, they also wouldn’t be able to collect regular unemployment benefits through EI.

It’s a trade-off. Save a bit more money now but then no EI coverage later.

Register for EI Special Benefits

The second option is that the non-arm’s-length employee can register for EI Special Benefits.

These EI Special Benefits are designed for self-employed people or business owners who own more than 40% of their corporation’s voting shares.

There are less options available under EI special benefits compared to the standard EI benefits, but there are some decent options for parents here as well.

EI Special benefits include

• Maternity leave for up to 15 weeks at a maximum of $638 per week
• Parental leave with two options for length and amounts (40 weeks @ $638/week or 69 weeks @ $383/week)
• Sickness leave for up to 15 weeks at a maximum of $638 per week
• Family caregiver benefits for children for up to 35 weeks at a maximum of $638 per week
• Family caregiver benefits for Adults for up to 15 weeks at a maximum of $638 per week
• Compassionate care benefits for up to 26 weeks at a maximum of $638 per week.

The table below 👇 can be found on this page. It includes links to details on each benefit type.

To Be Eligible to receive EI Special Benefits you’ll need to meet the following criteria

1. You’re a Canadian citizen
2. You’ve been registered for the program for at least 12 months 👀
3. You have decreased the amount of time you work by more than 40% 
4. You’ve met a minimum earnings threshold in the year prior to applying

If you just skimmed those criteria ☝, have a quick glance at number two again as we’ll come back to that one later.  It’s an important one to note.

Should You Register for EI Special Benefits?

Now that we know the options, we should discuss when it may be a good idea to choose one option over the other.

Option 1 - Don’t Register for EI Special Benefits

In option 1, the business owner doesn’t register for EI special benefits.

It may or may not be the right choice for you, but it’s the most common choice that we see business owners make.

The reasons that business owners choose this option include:

• Save Employee EI Contributions - They can personally save some money now by not contributing to EI
• Save Employer EI Contributions - The company also saves money because there is no employer portion of EI to remit
• Not Expecting to Use Maternity / Parental Leave - The business owner doesn’t expect to need maternity or parental benefits
• Must Contribute to EI Going Forward - If the business owner collects special benefits, they will need to continue paying EI premiums indefinitely

That last reason is a pretty big one.

Once someone collects EI special benefits, they would need to keep contributing to EI from that point onward at a cost of around $2,300 per year between the employee and employer EI contributions.

Option 2 - Register for EI Special Benefits

With option 2, the main reason we see business owners registering for special benefits is when they are expecting to collect maternity and/or parental benefits.  

Some planning is necessary here because the business owner needs to be registered and contributing to EI for at least 12 months before collecting benefits.

Then once the business owner has received EI special benefits they will need to contribute to EI indefinitely.

Comparing Cost vs. Benefit

We can do some basic math to see when a business owner might come out ahead if they registered for EI and then maxed out maternity and parental benefits.

The maximum benefit that a mother could receive is about $32,000 when combining maternity leave with parental leave.  

(35 weeks x $638 = $22,330 parental) + (15 weeks x $638 = $9,570 maternity) = $31,900

That benefit is approximately equal to 14 years of EI contributions at $2,300 per year of employer and employee contributions combined.

So you could say this person would “break even” if they expect to max out their benefits but then only contribute to EI for 14 years total.

If the business owner is only able to access parental leave, the total benefits would be closer to $22,000 making the break even just under 10 years.

It’s an overly simplistic calculation because there are some major unknowns.  

• It’s pretty rare to see business owners taking that much time off to claim the maximum amount of maternity and parental benefits.
• They also probably don’t know how long they’ll be business owners and contributing to EI in the future.

The best thing to do is to think through your plans for the future and then have a chat with your accountant to see if registering for EI special benefits makes sense for you.

Next we’ll take a quick look at how to register for EI special benefits.

How to Register for EI Special Benefits

Important Note: Before registering, it’s important to make sure that you leave yourself at least 12 months between registering for EI special benefits and when you expect to need them.

This is because to be eligible to receiveEI special benefits, you’ll need to have been registered in the program for at least 12 months.

To register, head over to this Government of Canada website first.

You will then need to sign up for or log into a “my service Canada account” where you can register.

If you don’t have a login for this yet, the process can take a couple of weeks because Service Canada will snail-mail you an access code. 

Once you have a Service Canada account, though, the EI special benefits registration is pretty straightforward.  Just follow the instructions, provide the requested information and submit your registration.

I’ll add one more quick note on registering for EI special benefits.  If you register but then change your mind before collecting any benefits, you can still withdraw from the program.

Summary

The decision to register for EI special benefits or not depends on your given situation and plans for the future. 

Hopefully this article has provided a general overview and shed some light on a topic that isn’t all that well known. Now if you come across this situation, you’ll be able to identify the issue and make an informed decision yourself, or give your accountant a call to discuss your options.

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