Labour unions appeared before the Supreme Court of Canada on Tuesday to argue the federal government has been improperly spending billions of surplus dollars in the unemployment insurance fund.

The court reserved judgment Tuesday afternoon and didn't set a date for a ruling.

Brought by the Quebec-based labour union Confédération des syndicats nationaux (CSN), the unions' argument is that the Employment Act fund shouldn't go into general revenue and pay for things such as debt reduction. Doing so turns it into an indirect tax and is unconstitutional, they argue.

"The reality is the government owes $55 billion to the insurance system and they need to pay it back," Barbara Byers, vice-president of the Canadian Labour Congress, told CBC News before the hearing began.

Intervening in the case are the Canadian Labour Congress as well as the attorneys general of Manitoba, New Brunswick, Newfoundland and Labrador, Ontario and Quebec.

They argue that the government has misused EI funds dating back to 1996, when the act was amended to make it more difficult to qualify for unemployment benefits. Since then, the employment insurance account surplus has ballooned to $54 billion.

EI premiums are set once a year by Ottawa based on employment expectations. Some employers complain the government has been underestimating, resulting in an ever-increasing surplus that then goes into general revenues.

"The surplus has been used to pay down debt, It's been used to give tax cuts to large corporations and oil companies, it's been used for all sorts of other purposes, but not for unemployment insurance," said Byers.

"That's money that comes from workers and employers for unemployment insurance. It's not an extra tax, it's not to be spent on other things."

The Quebec Court of Appeal ruled against the unions after finding the EI premiums collected were within federal taxation powers.

In this year's federal budget, Ottawa announced the creation of an independent Crown corporation to manage future surpluses in the EI account, restrict use of the fund to EI benefits and limit premiums, while creating a cushion of $2 billion in a side account in case of a sudden economic downturn.

Auditor General Sheila Fraser has repeatedly slammed the government over its handling of EI since 1999, saying the surplus size is more than triple what would be deemed sufficient and the government is not observing the intent of EI.