Are You Overpaying EI Premiums for Family Employees? You Could Be Owed Thousands

I was processing payroll for a client last month when she mentioned something that made me stop and pay attention. Her daughter had been working in the business for three years. They had been deducting and remitting Employment Insurance premiums the entire time. The daughter recently needed to claim EI benefits and was denied.

Three years of premiums paid. Thousands of dollars. And she was not even eligible.

This happens more often than you might think with family businesses. Business owners and their family members pay into Employment Insurance for years, assuming they are doing everything correctly, only to discover they should not have been paying EI premiums at all.

The good news? If this describes your situation, you may be entitled to a refund for the last three years of EI premiums. We are talking potentially thousands of dollars back in your pocket.

Understanding EI Premiums for Family Business Owners

Employment Insurance is designed to provide temporary income support to employees who lose their jobs through no fault of their own. But not everyone who works is eligible to collect EI benefits, and if you cannot collect benefits, you should not be paying premiums.

This is where family businesses get tricky.

As someone who processes payroll for dozens of small businesses throughout Chilliwack and the Fraser Valley, I see family employment situations constantly. Parents hire their children. Spouses work together. Siblings run businesses. These arrangements are common and perfectly legitimate.

But the EI rules for family members differ from those for regular employees, and many business owners do not realize it.

Are Business Owners Eligible for Employment Insurance?

Let me start with business owners themselves because this is the first place I see money being wasted.

If You Own a Corporation

If you are an employee or officer of a corporation and you control more than 40% of the voting shares, you are automatically deemed uninsurable for EI purposes. You should not be paying EI premiums, and you can request a refund for any premiums paid in the last three tax years.

Think about that. If you own 50% of your corporation and have been deducting EI from your own paycheque, you have been overpaying. Every single paycheque. For potentially years.

If you own less than 40% of the voting shares, the situation is less clear-cut. I recommend you complete the CRA ruling process to determine your status definitively.

If You Are a Sole Proprietor

If you operate as a sole proprietor, you are automatically deemed uninsurable because you are not considered an employee of your business. You do not need to pay EI premiums on your own income, and you can claim a refund of any premiums paid.

However, if you hire an employee (even a family member who qualifies as insurable), you will need to deduct and remit EI for that employee. The exemption applies only to you as the owner, not to your staff.

Employment Insurance Eligibility for Family Employees

Now we get to the complicated part: family members who work in your business.

The Canada Revenue Agency uses something called the “arm’s length” test to determine whether a family employee is insurable for EI purposes. This test examines whether the family member is treated the same as a non-related employee would be.

Here is what this means in practice.

What Does “Arm’s Length” Mean for Family Business Employment?

By virtue of being related, family members may have more (or fewer) duties, responsibilities, and privileges than a worker who is not related to you. The CRA assesses whether the employment relationship would exist in the same form if the worker were not a family member.

Example of arm’s length employment:

You own a plumbing business. You hire your son as a plumber. His sole responsibility is plumbing work. He works the same hours as your other plumbers, gets paid the same rate, has the same responsibilities, and follows the same rules. The only difference is that he happens to be your son.

In this case, he is likely considered to be dealing at arm’s length. His employment would be insurable, you would continue paying EI premiums, but he would be eligible to claim EI benefits if necessary.

Example of non-arm’s length employment:

You own the same plumbing business. Your son does the plumbing, but he also handles the accounting, sets his own schedule, has access to the company truck for personal use, takes extended vacations whenever he wants, and generally operates with freedoms your other employees do not have.

These extra responsibilities and benefits exist because he is your son. He would likely not be considered to be operating at arm’s length to your business. If the CRA rules as such, you can request a refund of EI premiums paid in the previous three tax years.

The difference between these two situations can mean thousands of dollars.

How to Determine If Your Family Employee Is Insurable for EI

The only way to know definitively whether a family employee is insurable is to request an official ruling from the CRA. This is not optional if you want certainty and the possibility of a refund.

Here is the process I walk clients through.

Before requesting a ruling, understand what the CRA considers. They look at factors including:

Duties and responsibilities – Does your family member have the same job duties as a non-related employee would?
Compensation – Is the pay in line with what you would pay a non-family member for the same work?
Working conditions – Do they follow the same schedule, rules, and expectations as other employees?
Benefits and privileges – Do they receive perks or freedoms that non-family employees do not?
Control – Do you supervise and direct their work the same way you would a regular employee?
Duration and nature of work – Is the employment ongoing and consistent, or sporadic based on family convenience?

If your family member is treated materially differently from a regular employee, they may not be dealing at arm’s length and therefore may not be insurable.

The EI Ruling and Refund Process for Family Business Employees

If you suspect your family employee should not have been paying EI premiums, here is exactly how to address it.

Step 1: Read the CFIB guide on EI and family members. The Canadian Federation of Independent Business has published helpful information on this topic. Review it before proceeding so you understand what to expect.

Step 2: Complete and submit the Request for an EI Ruling (CPT1 form). You can access this form through the CRA website or submit it through your My Business Account portal online.

Step 3: Complete and submit the Request for a Refund form (PD24). This is a separate form specifically for requesting the refund of overpaid premiums.

Step 4: Cooperate with the EI Ruling Officer. An officer will contact you and your family member to ask questions clarifying if and how they are treated differently than a regular employee. Be honest and thorough in your responses.

Step 5: Continue paying EI premiums until you receive the ruling decision. Do not stop remitting premiums while your ruling is pending. Only stop once you have official confirmation that the family member is uninsurable.

Common Family Business EI Situations I See

After years of processing payroll for family businesses, here are the most common situations I encounter:

Children in the Family Business

Adult children working for their parents is extremely common. The key question is always: would this employment arrangement exist if they were not your child?

If your daughter manages your retail store the same way any store manager would, she is probably insurable. If she sets her own hours, takes inventory for personal use, has signing authority on accounts, and basically operates as a co-owner despite being classified as an employee, she probably is not insurable.

Siblings as Business Partners

When siblings own and work in a business together, the ownership percentage matters. If one sibling owns more than 40% of the voting shares, they are automatically uninsurable. The other siblings need to be assessed based on the arm’s length test.

The Financial Impact of Overpaid EI Premiums

Let me give you real numbers so you understand the potential refund amount.

In 2025, the EI premium rate is 1.66% of insurable earnings for employees, with employers paying 1.4 times the employee contribution (2.324%).

Example calculation:

Your son works in your business and earns $50,000 per year. You have been deducting and remitting EI premiums for three years, but he is actually not dealing at arm’s length and should not have been insurable.

Employee premiums paid: $50,000 × 1.66% × 3 years = $2,490
Employer premiums paid: $50,000 × 2.324% × 3 years = $3,486
Total overpayment: $5,976

That is nearly $6,000 that could be refunded. For a family business, that is real money.

Now imagine you have two family members in similar situations. Or the salary is higher. Or they have been working in the business for the full three refundable years. The numbers add up quickly.

How I Help Clients Navigate Family Employee EI Issues

As someone who processes payroll regularly, I am in a unique position to identify potential EI overpayment situations.

When I start working with a new client who has family members on payroll, one of my first questions is: Have you obtained an EI ruling for your family employees? Most of the time, the answer is no. They have been processing payroll the same way for years without questioning whether it is correct.

Here is how I help:

I identify potential issues. When I see family names on the payroll, I ask about the employment relationship and whether an EI ruling has been obtained.
I explain the arm’s length test. Most business owners have never heard of this concept. I explain what the CRA looks for and help them assess whether their situation likely qualifies.
I guide them through the ruling process. The forms are not complicated, but they can be intimidating if you have never dealt with CRA rulings before. I walk clients through what information is needed and how to present it.
I help calculate potential refunds. I can run the numbers to show exactly how much money might be refunded, which helps clients decide if pursuing the ruling is worthwhile.
I adjust payroll going forward. Once a ruling is received, I update the payroll system to stop deducting EI for uninsurable family members.

This is part of what I mean when I say that bookkeeping is about supporting small businesses, not just processing transactions. Yes, I could just run payroll the way you tell me to and never question whether it is set up correctly. But that is not helping you. That is just checking boxes.

I would rather take the time to ensure your payroll is optimized and you are not wasting money on unnecessary premiums.

Common Questions About EI Premiums for Family Employees

How far back can I claim an EI refund for family employees?
You can request a refund for the previous three tax years. Any premiums paid before that cannot be recovered.

Will requesting an EI ruling trigger a CRA audit?
No. Requesting a ruling is a normal administrative process and does not increase your audit risk. In fact, getting proper rulings demonstrates that you are trying to comply correctly.

What if my family member wants to be eligible for EI?
If the employment relationship is such that the family member would be considered to be dealing at arm’s length, they can remain insurable and eligible for EI benefits. The ruling process simply clarifies the status.

Can I stop paying EI premiums before getting the ruling?
No. You must continue paying EI premiums until you receive an official ruling stating the individual is uninsurable. Stopping prematurely could result in penalties.

What if the CRA rules that my family member is insurable?
Then you continue paying EI premiums as before. At least you will have certainty about the situation.

Does this apply to common-law spouses?
Yes. The arm’s length test applies to all related individuals, including spouses (married or common-law), children, parents, siblings, and other relatives.

Need Help Determining Your EI Status for Family Employees?

If you have family members working in your business and you are unsure whether you should be paying EI premiums, I can help. As someone who processes payroll regularly and has helped numerous clients through the ruling and refund process, I can:

Review your family employment situations
Help you understand the arm’s length test
Assess whether requesting a ruling makes sense
Calculate your potential refund
Guide you through the CRA forms and process
Adjust your payroll system once the ruling is received

This is not something you should ignore. If there is money owed to you and your family members, you deserve to get it back.