Orlando Harmon
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 due to illness. EI benefits are calculated based on insurable earnings, which generally include an employee's gross earnings and cash taxable benefits, up to a maximum yearly insurable amount. While pension income resulting from employment is typically considered earnings for EI purposes, there are specific scenarios where it may not be included, such as when an individual requalifies for EI benefits after the pension payment start date. Additionally, certain types of employment income, such as that of shareholders with substantial control in the company, are excluded from insurable earnings, resulting in no EI premiums being paid on that income.
| Characteristics | Values |
|---|---|
| Definition of insurable earnings | The total amount of earnings that a person has from all insurable employment, with certain exceptions |
| Insurable earnings calculation | Multiplying the insurable earnings (subject to the yearly maximum) by a premium rate set each year by the Office of the Chief Actuary |
| Insurable earnings and cash benefits | Cash benefits include cash money, cheques, bank drafts, and promissory notes. The value of board and lodging is included in insurable earnings if provided in the same pay period |
| Insurable earnings and non-cash benefits | If a worker is paid entirely in non-cash benefits, there are no insurable earnings. If paid partially in cash and non-cash benefits, only the cash portion is considered insurable earnings |
| Insurable earnings and pension income | Pension income resulting from employment is considered earnings for benefit purposes. However, pension income resulting indirectly from employment may not always constitute earnings |
| Insurable earnings and employment income | Some employment income is excluded from insurable earnings, such as employees who are not at arm's length from their employer, including close relatives of the owner or those treated differently |
| Maximum yearly insurable earnings amount | $65,700 as of January 1, 2025 |
| Basic rate for EI benefits | 55% of average insurable weekly earnings, up to a maximum of $695 per week |
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What You'll Learn
Insurable earnings are based on total yearly earnings
In Canada, insurable earnings are based on total yearly earnings. Insurable earnings are the total amount of earnings that a person accumulates from all insurable employment, with certain exceptions. This includes most types of compensation from employment, such as wages, tips, bonuses, and commissions. Employers are required by law to deduct Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums from most amounts they pay their employees. These deductions are made from the employee's salary, and the employer must also pay their share, which is typically 1.4 times the employee's premium.
The Canada Revenue Agency (CRA) determines which types of earnings and hours are insurable. Insurable earnings must be paid partially or entirely in cash. If a worker is paid in a combination of cash and non-cash benefits, only the cash portion is considered insurable. However, if the worker is provided with board and lodging along with remuneration for the same pay period, the value of the board and lodging is included in insurable earnings.
It is important to note that insurable earnings are subject to a maximum limit set each year. This means that once an individual's earnings exceed this threshold, the additional income is not considered insurable. The basic rate for calculating EI benefits is 55% of the average insurable weekly earnings, up to a maximum amount. As of January 1, 2025, the maximum yearly insurable earnings amount was set at $65,700, resulting in a maximum benefit of $695 per week.
Insurable earnings are distinct from non-insurable earnings, and it is crucial for employers to understand this distinction. Employers are responsible for issuing Records of Employment (ROEs) for employees who receive insurable earnings and work insurable hours. In cases of uncertainty, employers can seek guidance from the Canada Revenue Agency (CRA), which provides insurability rulings.
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Insurable earnings include cash, cheques, bank drafts, and more
In Canada, insurable earnings are the total amount of earnings that a person accumulates from all insurable employment. Insurable earnings must be paid partially or totally in cash. If a worker is paid entirely in cash, then the earnings are entirely insurable. If a worker is paid partly in cash and partly in non-cash benefits (in kind), only the cash portion of the payment is considered insurable. Non-cash benefits can include a bus pass or gas for a company car. However, there is an exception to this rule: if a worker is provided with board and lodging and paid remuneration for the same pay period, the value of the board and lodging is included in insurable earnings. This is because board and lodging are considered equivalent to cash as they can be converted into cash.
Insurable earnings include most of the different types of compensation from employment, such as wages, tips, bonuses, and commissions. They can also include cash equivalents, such as cheques and bank drafts, which can be converted into cash. The Canada Revenue Agency (CRA) determines what types of earnings are insurable. For example, gift certificates and smart cards are not included in insurable earnings because they cannot be readily converted into cash. Insurable earnings also include amounts reported on an earnings statement or wage slip before any deductions are made for income tax, Employment Insurance (EI), Canada Pension Plan (CPP), health care plans, loan payments, and union dues.
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Pension income may or may not be considered earnings
In Canada, insurable earnings are defined by the Insurable Earnings and Collection of Premiums Regulations (IECPR) as the total amount of earnings derived from all insurable employment, with certain exceptions. Insurable earnings must be paid partially or totally in cash. If a worker is paid entirely in cash, their earnings are entirely insurable. If they are paid in part by cash and in part by a non-cash benefit, only the cash portion is considered insurable. If a worker is paid entirely in non-cash benefits, there are no insurable earnings.
Now, when it comes to pension income, the situation is more nuanced. Pension income may or may not be considered earnings, depending on various factors and contexts. Firstly, it is important to distinguish between pension income and earned income. Earned income typically refers to money earned from employment or services rendered, while pension income is received during retirement and may be funded by pre-tax or after-tax contributions.
In the context of tax planning, understanding whether pension income is considered earned income is crucial. From a taxation perspective, pension income is generally considered taxable income by the IRS. However, according to the Social Security Administration in the United States, pension income is not supposed to count towards income related to Social Security Taxes. The distinction lies in how pension contributions were made. If pension contributions were funded with pre-tax dollars, which is common in employer-sponsored plans, income tax will generally be owed on the pension payments received. On the other hand, if after-tax contributions were made to a pension plan, a portion of the benefits may be tax-free. In such cases, the IRS uses the Simplified Method formula to determine the tax-free percentage, preventing double taxation on the same income.
Additionally, the treatment of pension income can vary at the state level within the United States. Some states, like Illinois, Mississippi, and Pennsylvania, fully exempt pension income from state taxes. Conversely, other states may tax pensions just like any other form of income, while some offer partial exemptions based on age or income levels. Therefore, it is essential to understand the specific rules and regulations of your state to effectively plan for retirement and minimise tax liabilities.
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Employers must deduct EI premiums from employee gross pay
In Canada, employers are required by law to deduct Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums from most amounts they pay to their employees. The EI premiums are deducted from an employee's insurable earnings, which are considered the total amount of earnings from all insurable employment, typically in the form of cash.
To calculate EI premiums, employers can use the manual calculation method or refer to the EI premiums tables. This involves determining the employee's gross pay, taxable benefits, and allowances, and then subtracting any earnings from employment, benefits, or payments that are exempt from EI deductions. The resulting amount represents the insurable earnings for the period of employment, which is used to calculate the EI premiums.
It is important to note that EI premiums must be withheld until the employee reaches the maximum EI contribution for the year, regardless of deductions made by another employer. Additionally, employers must also contribute 1.4 times the amount of the EI premiums deducted from their employees' remuneration.
In the case of employees working in Quebec, employers must deduct a reduced EI premium using the Quebec EI premium rates and maximums, along with the Québec Parental Insurance Plan (QPIP) premiums. Furthermore, employers providing a wage loss replacement plan for short-term disability can request a reduced EI premium rate through Employment and Social Development Canada (ESDC).
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Some employment income is excluded from insurable earnings
In Canada, the Canada Revenue Agency (CRA) determines what types of earnings are insurable. Insurable earnings include most types of compensation from employment, such as wages, tips, bonuses, and commissions. However, some types of employment income are excluded from insurable earnings.
Firstly, if a worker is paid entirely in non-cash benefits, there are no insurable earnings. If a worker is paid partially in cash and partially in non-cash benefits, only the cash portion is considered insurable earnings. For example, if an employer provides a worker with a bus pass or reimburses non-work-related parking expenses, these are non-cash benefits and are not considered insurable earnings.
Secondly, certain types of earnings are specifically excluded from insurable earnings. These include pregnancy or maternity benefits, parental benefits paid in addition to EI benefits, and severance pay under the Employment Standards Act. Additionally, earnings of executive officers and sole proprietors are generally not included in insurable earnings unless they have voluntarily elected for optional insurance.
Thirdly, contributory salary and wages do not include earnings received during any month that is excluded from the contributory period under the Canada Pension Plan (CPP) due to disability or retirement. For example, if a worker has reached 65 years of age and is receiving a retirement pension under the CPP, they can elect to exclude this income from their contributory salary.
It is important to note that the determination of insurable earnings can vary based on specific circumstances and regional regulations. Employers should refer to the relevant government sources for detailed information on what constitutes insurable earnings in their specific context.
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Frequently asked questions
Insurable earnings are the total amount of earnings that a person has from all insurable employment, with certain exceptions. Insurable earnings include most types of compensation from employment, such as wages, tips, bonuses, commissions, and cash taxable benefits.
Pension income resulting from any employment is considered earnings for benefit purposes. However, pension income resulting indirectly from employment does not always constitute earnings. If an individual requalifies for EI benefits after the date pension payments begin, the pension income is not considered earnings and will not be deducted from the benefits.
Yes, some employment income is excluded from insurable earnings, such as non-cash benefits and direct tips. Additionally, employees who are not considered to be at "arm's length" from their employer, such as close relatives of the owner or those treated differently, may have their employment income excluded from insurable earnings.
The basic rate for calculating EI benefits is typically 55% of your average insurable weekly earnings, up to a maximum amount. The number of weeks you may receive benefits depends on the regional rate of unemployment and the number of insurable hours accumulated.
EI insurable earnings are based on gross income. However, it's important to note that only earnings that are payable immediately are allocated for EI benefit purposes, and certain types of income may be excluded from insurable earnings.
