4.3 Employment Insurance

Meena K. Gupta; Gayle St. Denis; Ikram Ibrahim

Chapter 4: Statutory and Non-Statutory Deductions

4.3 Employment Insurance

Sign post in the shape of an arrow, modified to read "Employment Insurance"

4.3.1 What is employment insurance?

Employment insurance (EI) is a federally legislated program that provides temporary support for workers who are unemployed, on maternity or parental leave, or unable to work because of illness. Employees contribute to EI based on the annual premium rate set by the Canada Employment Insurance Commission, which sets rates based on a seven-year break-even formula (Government of Canada, 2021).

Employers are responsible for deducting employees’ EI premiums from their gross pay and remitting payments to the CRA. The premiums are collected on “insurable earnings,” which includes employees’ gross earnings, as well as cash taxable benefits, up to a yearly maximum insurable amount. Note that unlike CPP contributions, there is no age limit for deducting EI premiums. There is a maximum amount of EI premiums to be collected for any employee; these amounts are updated annually and can be found here: Calculate payroll deductions and contributions: EI premium rates and maximum

Cash benefits include cash money, cheques, bank drafts, and promissory notes, and do not include gift cards (Government of Canada, 2019b). Unlike pensionable earnings, non-cash taxable benefits are not included in insurable earnings. There is one exception: the value of board and lodging is included in insurable earnings if an employee is paid for the same pay period in which they are provided with board and lodging (Government of Canada, 2019b).

Controlled tips are included in insurable earnings, and EI premiums must be deducted. Direct tips are excluded from insurable earnings. See the discussion in section 4.2.1 Canada Pension Plan on direct versus controlled tips.

A comprehensive chart detailing what is and is not included in EI insurable earnings can be found here: Employment Insurance (EI) earnings chart

Some employment income is excluded from insurable earnings (meaning that EI premiums do not have to be paid on that income), namely employees who are not considered to be at arm’s length from their employer. Arm’s length can mean employees who are close relatives of the owner of an employer organization or employees who are treated differently (e.g., being paid very differently than other employees doing similar work or receiving bonuses that others don’t receive) (Government of Canada, 2019a). Employees who are shareholders are often considered to have a non-arm’s-length relationship with employers (Government of Canada, 2019a). Employment income for employees who are shareholders and control at least 40% of the employer company are automatically excluded from insurable earnings as per the Employment Insurance Act, s. 5(2)(b) (Employment Insurance Act, 2023). Employers may request a ruling from the CRA if it is unclear whether a non-arm’s-length relationship exists between the employer and the employee.

4.3.1.1 EI Calculation

An employee’s EI premium is calculated as follows, for each pay period:

Employee EI Premium = Insurable Earnings × Current Year EI Premium Rate

If payroll is conducted using software, the software should accurately calculate EI premiums. The RA’s online payroll calculator can also be used to determine employee EI premiums. Note that EI should always be calculated based on the current rate. Typically, rates are updated in November for the following calendar year.

Check rates here: Calculate payroll deductions and contributions: EI premium rates and maximum

The steps for calculating EI premiums manually can be found here: How to calculate EI premiums deductions

Contributions should be capped if the employee has reached the yearly maximum EI premium threshold of $1,049.12 (Government of Canada, 2024).

Calculating EI Premiums Example

Use the steps for calculating EI premiums to solve the following problem:

Bo is paid weekly. In this pay period, Bo earned $1,675 in wages and received $425 in tips, collected by the employer electronically and paid in cash to Bo at the end of the pay period. Calculate Bo’s EI premium for the current pay period.

Step

Instructions

Step 1

Calculate the employee’s total insurable earnings for the pay period.

Total Insurable Earnings = Gross Income + Taxable Cash Benefits and Allowances for the pay period

Total Insurable Earnings = $1,675 + 425 = $2,100

Step 2

Multiply the employee’s total insurable earnings by the current EI premium rate. For 2023, the current rate is 1.66%.

EI Premium Rate = $2,100 × 0.0166 = $34.86

Bo’s EI premium for the current pay period is $34.86.

References

Employment Insurance Act, SC 1996, c. 23. (2023). https://canlii.ca/t/55vcf