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OTTAWA - The former Liberal government broke the law by diverting billions of dollars in employment insurance premiums to help whittle down the federal deficit, the Supreme Court of Canada was told Tuesday.

A group of labour unions from Quebec, backed by the Canadian Labour Congress, wants the high court to set things right by belatedly declaring the diversion unconstitutional - and ordering Ottawa to return $54 billion to the EI account.

The money represents the surplus accumulated by the EI program since 1996, when legislation brought in by Jean Chretien's government tightened the eligibility rules for jobless payments.

The 300,000-member Confederation des Syndicats Nationaux, one of Quebec's leading labour organizations, contends the Liberals deliberately continued to set the premiums paid by workers and employers far higher than necessary to pay for the reduced benefits.

The result, they say, was a windfall to the federal treasury that could be used for other things - in effect, a back-door means of raising revenue to balance the government's books.

"All these premiums that are collected have to serve a purpose under the Constitution, in our view," CSN layer Guy Martin told the court.

"And that is to fund the EI plan. If you're collecting a lot more than that for other purposes . . . that doesn't meet constitutional requirements."

The court challenge echoes a long-running political debate. Paul Martin, as finance minister under Chretien, was repeatedly accused by critics on the left of fighting the deficit on the backs of workers by appropriating the EI surplus and transferring it to the government's general revenue fund.

Both the CSN and the CLC claim that can't be justified under a constitutional amendment dating from 1940 that gave Ottawa the power to first set up an employment insurance regime.

Nor can the move pass muster under other constitutional provisions dealing with federal taxation power, the critics maintain.

But several of the nine judges hearing the case noted there's a big difference between criticizing government policy as unwise and claiming that it's illegal.

"We often see in this court that . . . the government did this or that thing which really wasn't' fair," Chief Justice Beverley McLachlin interjected at one point.

"But your submission is that because the government may have misused its power, the power itself is unconstitutional. I'm having trouble following that."

Federal lawyer James Mabbutt maintained the unions want to narrow the rules so much that future governments would be placed in a "constitutional strait jacket" in managing the EI system.

"These are political issues, not legal ones," said Mabbutt.

He noted that the same 1996 law that set tougher eligibility criteria for EI recipients also created new job placement and training programs that would be imperilled if the legislation is struck down.

Federal officials also argue that the surplus premiums, though transferred to general revenue, continue to be labelled as EI money and could theoretically be moved back to pay for jobless benefits if need be.

But that claim was dismissed as a "constitutional mirage" by Steven Barrett, the lawyer for the Canadian Labour Congress.

He likened the arrangement to a hypothetical bank account where depositors - in this case the employees and employers paying EI premiums - can put money in but can't take it out.

"Would you put your money in a bank where, effectively, you've given them a permanent loan which never has to be repaid?" said Barrett.

The current Conservative government proposed, in its February budget, to set up an independent Crown corporation to manage the EI system. But the Tories haven't proposed to restore the $54 billion at issue in the court case.

The CSN launched its legal challenge in 2003 in partnership with an aluminum workers' union in the northern Quebec town of Arvida. Both Quebec Superior Court and the Quebec Court of Appeal have since rejected the constitutional arguments.

The Supreme Court reserved judgment Tuesday and will likely take several months to deliver a ruling.