Mark Eyking said more than 180 people living in communities north of Cape Smokey — such as Bay St. Lawrence — were denied their insurance claims.
The MP for Sydney-Victoria said residents were told the denial was the result of a Canada Revenue Agency investigation that found claimants were working for family members and not maintaining the required arm's-length relationship between employers and employees.
Eyking said in small communities, people can't avoid working for their relatives.
"People are in shock. They're saying, 'Well, we're not doing anything different. We're not doing anything we think is illegal,'" he told CBC News on Wednesday.
"People are in dire straits up there. Some of them are having to go on welfare."
Eyking said the federal government is unfairly targeting people in small fishing communities and wants Canada Revenue Agency officials to have another look at how smaller communities operate.
"Right now there are at least 180 claims that are uninsurable, which is devastating for that area," he said.
"When you think about the amount of people that live in northern Cape Breton and the families, it's really a dark cloud."
The Canada Revenue Agency directed all questions to Human Resources and Skills Development Canada, which did not respond to a request for a comment.
Eyking said affected residents can appeal, but that process can take months.
Clayton MacKinnon, the chief of the Bay St. Lawrence Volunteer Fire Department, said there is little work in the area over the winter and without Employment Insurance, people don't know where to turn.
"It's not like in the big towns, there's no Tim Hortons or McDonald's or somewhere we can go and work," said MacKinnon.
"We only have the fishing and seasonal unemployment and that's it."Suggest a correction