Employment Insurance for Incorporated Business Owners: What Corporate Shareholders Need to Know
When you incorporate your business, the way you pay yourself salary, dividends, or a combination has consequences that extend well beyond your tax return. It affects whether your employment is “insurable,” whether you are building EI eligibility, and whether you can claim EI benefits if your business slows down or shuts down entirely.
The short answer most incorporated owners don’t realize: if you own more than 40% of the voting shares in the corporation that employs you, your employment is generally excluded from insurable employment under the Employment Insurance Act (EIA). That means no EI premiums are being deducted from your salary, and no EI benefits can be claimed regardless of how much you have paid yourself over the years.
Understanding this before you structure your corporation, your share ownership, and your compensation plan is significantly better than discovering it after a job loss.
The 40% Voting Shares Rule
Section 5(2)(b) of the EIA excludes from insurable employment the employment of a person who controls more than 40% of the voting shares of the corporation that employs them. This is a hard threshold, not a sliding scale. If you own 41% of the voting shares, your employment is excluded regardless of whether you are actually exercising control over day-to-day operations or simply holding shares as a passive investor.
“Voting shares” refers specifically to shares that carry voting rights. If you hold nonvoting preferred shares, those typically don’t count toward the 40% threshold, but the share class structure of your corporation needs to be reviewed carefully to confirm how the rules apply to your specific situation.
The practical effect is significant. An incorporated founder who pays themselves a $100,000 salary through their wholly owned corporation is generally paying no EI premiums and accumulating no EI eligibility. If the business fails or the contract ends, EI benefits are not available.
When Can a Controlling Shareholder’s Employment Be Insurable?
There is a path to insurable employment for a person who controls more than 40% of the voting shares, but it is not automatic. Under Section 5(3) of the EIA, the CRA’s Minister of National Revenue may determine that a shareholder-employee’s employment is insurable if satisfied that the employment terms are substantially similar to what would have been agreed with an arm’s length employee in other words, if the arrangement looks like a real employment relationship rather than a structure designed to access EI.
Obtaining this determination requires a ruling from the CRA. The CRA will look at factors including the compensation paid relative to market, the hours worked, the duties performed, and the degree of oversight and control. If the corporation pays the controlling shareholder a salary well above or below market, or if the shareholder has discretion to vary their own compensation at will, the CRA is unlikely to find the arrangement insurable.
If you want to ensure your salary from a corporation you control more than 40% of is insurable, discuss the structure with a lawyer and accountant before the compensation arrangement is put in place not after the fact when you are already in dispute with the CRA.
Dividend Income Is Never Insurable
Dividends are not employment income and do not generate insurable hours under the EIA. No matter how large the dividends received from your corporation, they cannot be used to qualify for EI, and they do not attract EI premiums. This is true whether or not you are actively involved in the operations of the business.
Many incorporated owners take a mix of salary and dividends, often driven primarily by income-splitting and tax efficiency goals. For those who want to maintain some EI eligibility, the salary component must be structured through insurable employment. Dividend income contributes nothing to EI eligibility.
The decision between salary and dividends is one of the core annual planning questions for incorporated business owners. It involves income tax, EI, CPP, and corporate tax planning considerations that often point in different directions. For an overview of the broader structural considerations, see our articles on incorporation and shareholder compensation planning.
Active Management and Reporting While on EI
Even if a shareholder does not hold insurable employment, if they are actively involved in the operations of a corporation, making management decisions, directing employees, or declaring dividends, that activity must be reported while collecting EI benefits. The EI reporting obligation covers all “work” during a benefit period, which the CRA interprets broadly to include active management of a business, not just paid employment.
A shareholder who is passively holding shares and collecting dividends while on EI from a separate employer may have little to report in connection with those shares. But a founder-shareholder who continues to run day-to-day operations and retain signing authority over the business cannot collect EI while treating that involvement as passive. The distinction between active and passive shareholder involvement is fact-specific and should be reviewed with legal and accounting advice before making EI claims.
The Voluntary Self-Employed EI Program
There is a separate, voluntary EI program available to self-employed Canadians under Part VII.1 of the EIA. This program allows self-employed individuals and business owners to opt in to coverage for special benefits: maternity, parental, illness, compassionate care, and family caregiver benefits. It does not provide access to regular EI benefits for unemployment.
To access the program, you must register voluntarily with Service Canada, wait a minimum of 12 months before making a claim, and meet the insurable earnings threshold (currently $10,000 in self-employment income in the prior calendar year). Once registered, you pay EI premiums on your net self-employment income as part of your personal tax return.
This program is particularly relevant for incorporated owners who primarily pay themselves dividends and have no insurable employment; they cannot claim regular EI but may still access maternity or illness benefits through the voluntary self-employed program.
EI Planning at Incorporation: Getting the Structure Right
The most effective time to think about EI eligibility is when structuring your corporation, not after a business interruption. Key decisions include the following:
How many voting shares you will hold and whether that exceeds the 40% threshold. Whether some voting shares can be held by a spouse, family trust, or other entity in a way that keeps your personal voting control below 40%. Whether you want to seek a CRA-insurable employment determination for your salary. How to balance salary (potentially insurable, CPP-contributing) and dividends (tax-efficient but non-insurable) in your annual compensation plan.
For incorporated professionals and business owners in Ontario, these decisions interact with shareholder agreements, share class design, and long-term exit planning in ways that warrant a proper corporate and tax planning conversation before the structure is finalized.
Speak with a Corporate Lawyer at Kalfa Law Firm
Kalfa Law Firm advises incorporated business owners on compensation structure, share class design, and corporate planning. We work alongside your accountant to ensure your corporate structure reflects both your tax goals and your eligibility for personal benefits.
Related Reading
Incorporation in Ontario · Employee vs. Independent Contractor · Shareholders’ Agreements · Corporate Maintenance and Compliance · Benefits of a Holding Corporation
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Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and private M&A law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law.
© Kalfa Law Firm 2021. Updated September 7, 2026
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.
