Published: May 17, 2021
Last Updated: May 18, 2021
What is Ontario Employer Health Tax?
The Employer Health Tax is a payroll tax created by the Employer Health Tax Act in Ontario. It was originally conceived as a tax to assist with the funding of the Ontario Health Insurance Program and rolled-out over a number of years. For those businesses that pay remuneration to employees that report to work in Ontario or are paid through a business with a permanent establishment in Ontario, EHT must be calculated and remitted to the Ontario Ministry of Finance. While it is a payroll tax, unlike the CPP or EI, there is no employee paid portion; the employer bears 100% of the burden of this tax payment.
We have previously discussed some of the issues inherent to the Employer Health Tax audit, and how the relative “newness” of the EHT tax leads to confusion and lack of clarity in the law, but thought that a general overview would be helpful.
What Businesses Are Required to Pay EHT?
As a general rule, wherever there is an employer/employee relationship, the Employer Health Tax Act requires the payor/employer to pay a tax calculated on the total remuneration to the employee or employees.
While the default is that an employer is required to pay the EHT on all payroll, there is an exemption available to all employers; the EHT Act originally stated that where the total gross remuneration paid to employees was less than $450,000 per fiscal year-end, then the employer was exempt from the requirement to calculate and remit the tax.
On January 1, 2019, this exemption was raised to $490,000 and indexed to inflation as calculated by the Ontario Consumer Price Index, with increases to be applied every 5 calendar years. Later, during the Covid-19 pandemic, the Ontario government temporarily increased this exemption to $1,000,000 for the 2020 calendar year, in recognition of the financial hardships being experienced by Ontario businesses.
The bottom line is that if you run a business that exceeds the remuneration to employees threshold, whatever it may be in the current year, you are required to register and remit EHT on the total remuneration that exceeds the exemption – as a simple matter of fairness, the exemption applies to all employers, and those that exceed it are still eligible for the treatment on the amount up to the threshold.
How is the EHT Calculated?
The Employer Health Tax Act imposes the tax upon any type of remuneration paid to an employee that is taxable under any of sections 5, 6 or 7 of the federal Income Tax Act. This can include such benefits as tips & gratiuities, bonuses, vacation pay, director’s fees, advances, commissions and stock option benefits. The legislation appears to have been drafted to make things easier for registrants to calculate and remit – in essence, the employer takes the amount calculated on Line 14 of the T4 Summary, subtracts the exemption amount and then applies the appropriate tax rate.
The tax rates for the EHT, calculated as dollars above the exemption amount lead to a tax payable between 0.98% to a maximum of 1.95% of the total payroll amounts. The tax rate is graduated in the same manner as income taxes, so an employer’s marginal EHT rate will tend to fluctuate based on total remuneration paid.
The following chart summarizes the liability under the Employer Health Tax Act (after the annual tax exemption is deducted):
|Up to $200,000.00
|$200,000.01 to $230,000.00
|$230,000.01 to $260,000.00
|$260,000.01 to $290,000.00
|$290,000.01 to $320,000.00
|$320,000.01 to $350,000.00
|$350,000.01 to $380,000.00
|$380,000.01 to $400,000.00
Pro tax tips – Ignoring EHT Can Lead to Additional Taxes Owing
As with any tax law in Canada, the primary motivator for the taxing authority is to increase revenues. While this is a laudable goal, our government still must respect the rule of law when applying legislation. In EHT, and all Canadian tax law, form matters; our experience as professional Canadian tax lawyers has been that EHT tax auditors have improperly attempted to inflate the EHT tax base by including forms of payment and remuneration that are not included in the EHT act itself. If you think this is the case, you should contact one of our experienced Canadian tax lawyers to review your EHT tax case as soon as possible.
In addition, those with concerns can approach our Canadian tax lawyers for analysis and advice as to how to structure compensation without incurring EHT. When a thorough analysis is completed, the savings realized through reorganizations implemented for clients of our Canadian tax law firm have been huge. If you are interested in discussing your specifics circumstances, and how our office can help you plan around the EHT expense, contact our certified Specialist Canadian tax lawyer for a consultation.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."
Frequently Asked Questions
The payment of a salary is considered by the Ministry of Finance to be “employment income” for the purposes of the EHT Act. In circumstances where your business is above the exemption amount, it may make more sense to structure your pay as dividend-only as dividends are typically exempt from the EHT calculation. As above, this area of law is rather underdeveloped so proper tax planning and tax structuring is advised.
Paragraph 18(1)(a) of the Tax Act states that any deductions taken from income must be for the purpose of gaining or producing income. The Canada Revenue Agency’s position with respect to GST/HST is that to the extent the cost is incurred (and not refunded by way of Input Tax Credit) to generate income it is a current expense that may be deducted. In a similar way, though there is a dearth of specific information on this point, EHT tax liability incurred in an active business in a pursuit of profit is in the opinion of our knowledgeable Canadian tax lawyers deductible as a current expense for Ontario businesses on their income tax returns.