Changes to the Ontario Employer Health Tax

Employer Health Tax (“EHT”) is an Ontario payroll tax on remuneration paid to employees. Eligible employers are able to claim an exemption on the first $450,000 of Ontario payroll ($490,000 commencing January 1, 2019). Eligible employers generally include charities, and private sector employers with Ontario payroll for the year of less than $5 million, including the payroll of associated companies.

This exemption exempts smaller employers from paying EHT on the first $450,000 ($490,000 commencing January 1, 2019) of Ontario payroll, resulting in savings of up to $8,775 annually ($9,555 commencing January 1, 2019). Since this exemption needs to be shared by associated employers, multiplication of the EHT exemption is limited.

The 2017 Ontario budget further reduced the ability to multiply the EHT exemption by eliminating the EHT exemption for any employer that is a “designated member” of a partnership. A “designated member” includes a corporation which is not itself a partner of a partnership, but provides services to the partnership, and whose shareholder holds a direct or indirect interest the partnership. In addition, a corporation can also be a designated member of a partnership if the corporation does not deal at arm’s-length with a person that holds a direct or indirect interest in the partnership, and 90% of the corporation’s active income from providing services, is not from arm’s-length persons or partnerships (other than partnerships in which a person not dealing at arm’s-length with the corporation has an interest). The effective date of this change will be a date to be prescribed by the Minister, such date being no earlier than December 31st, 2017.

The 2018 Ontario budget proposed further anti-avoidance measures to prevent the multiplication of the EHT exemption and restrict those who could claim it to certain types of entities. However, in November 2018, the Ontario government announced that it would NOT be moving forward with these 2018 budget proposals.