Employer Health Tax (EHT)
Several Canadian provinces impose a payroll-based levy on employers commonly referred to as an Employer Health Tax (“EHT”). As of the date of this article, these regimes exist in the Canadian provinces of Ontario, British Columbia, Manitoba, Newfoundland and Labrador, and Quebec. Unlike income tax withholdings or Canada Pension Plan contributions, EHT is paid directly by employers on employee remuneration and is not deducted from employees’ wages.
Ontario Employer Health Tax
The Ontario Employer Health Tax is governed by the Employer Health Tax Act, R.S.O. 1990, c. E.11 (“EHTA”). Section 2(1) of the EHTA provides that every employer must pay tax to the Crown in right of Ontario equal to the prescribed percentage of the employer’s total Ontario remuneration for the year.
Definition of “Remuneration”
Remuneration includes:
- Amounts required to be included in an individual’s income from an office or employment under sections 5, 6, and 7 of the Federal Income Tax Act R.S.C., 1985, c. 1 (5th Supp.) (“ITA”), as incorporated by section 1(1) of the EHTA;
- Amounts paid to a trustee or custodian under an employees’ profit-sharing plan, employee benefit plan, employee trust, or salary deferral arrangement, together with other employment-related amounts or benefits included in income under sections 5, 6, or 7 of the ITA, pursuant to section 1(1.2) of the EHTA; and
- Amounts paid to non-arm’s-length parties that are deemed to be remuneration under the anti-avoidance rule in section 2(3) of the EHTA, with arm’s-length status determined under section 251 of the ITA.
Who Must Pay: Permanent Establishment and Nexus Rules
EHT applies to remuneration paid to:
- Employees who report for work at an employer’s permanent establishment in Ontario;
- Employees attached to an Ontario permanent establishment; and
- Employees who do not report to any permanent establishment of the employer but are paid from or through an Ontario permanent establishment.
These rules are found in sections 1(1) and 1(3.1) of the EHTA.
Section 1(2) of the EHTA defines “permanent establishment” broadly. In addition to traditional fixed places of business such as offices, branches, factories, workshops, and warehouses, the definition may extend to certain agency relationships, leased equipment, and substantial machinery situated in Ontario.
The Exemption Under Section 2.1 of the EHTA
Eligible employers may claim an annual exemption from EHT under section 2.1 of the EHTA. For taxation years beginning after December 31, 2019, and before January 1, 2029, the exemption is $1,000,000 of total Ontario remuneration.
Where employers are members of an associated group, the exemption must be allocated among the associated employers through a prescribed allocation agreement filed pursuant to section 2.1(13). Failure to properly allocate the exemption may result in the loss of the exemption for the group.
An “eligible employer” is defined in section 1(1) of the EHTA and generally includes employers that are subject to Part I of the federal Income Tax Act. Certain entities are excluded, including federal, provincial, and territorial governments, public-sector bodies and Crown agencies not subject to Part I tax, entities exempt under specified paragraphs of section 149(1) of the ITA, and prescribed persons. Notably, the exclusion does not extend to paragraph 149(1)(f), meaning registered charities remain eligible for the exemption.
However, where the combined total Ontario remuneration of an employer and all associated employers equals or exceeds $5,000,000 in a year, the exemption is reduced to nil under sections 2.1(5), (6), and (7) of the EHTA.
Returns, Instalments and Administration (Sections 3 and 5)
The annual EHT return must be filed on or before March 15 of the year following the calendar year in which the remuneration was paid.
Employers whose total Ontario remuneration exceeds $1,200,000 annually are required to make monthly instalment payments. Instalments are due on the 15th day of the month following the month in which the remuneration is paid.
Penalties, Interest, Offences and Director Liability
The EHTA contains significant compliance and enforcement provisions.
Failure to file a required return generally results in a penalty equal to 5% of the unpaid tax, plus an additional 1% for each complete month the tax remains unpaid, up to a maximum of 12 months.
Interest accrues daily at the prescribed rate.
Sections 31 through 34 of the EHTA create offences for:
- Failure to file required returns;
- Failure to maintain adequate records;
- Obstruction of an auditor; and
- Fraudulently obtaining a tax benefit.
These offences may result in substantial fines and, in serious cases, imprisonment.
Directors and officers should pay particular attention to section 36 of the EHTA. Where a corporation commits an offence, any director, officer, employee, or agent who directed, authorized, assented to, acquiesced in, or participated in the commission of the offence may be personally liable and subject to the same penalties, regardless of whether the corporation itself is prosecuted or convicted.
Disputing an EHT Assessment
An employer that disagrees with an assessment or reassessment issued under section 8 of the EHTA may file a Notice of Objection with the Minister of Finance under section 9, generally within 180 days of the mailing date of the assessment.
Upon receiving the objection, the Minister must reconsider the assessment and either vacate, confirm, or vary it.
A further right of appeal lies to the Ontario Superior Court of Justice under section 10(1) of the EHTA.
Because EHT disputes frequently turn on detailed factual issues—including employee status, the characterization of remuneration, corporate association, and the existence of a permanent establishment—careful recordkeeping and legal analysis at the objection stage are often critical to a successful outcome.
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Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/blog. If you have legal questions, please consult a lawyer.