Employer Health Tax (“EHT”) is a part of our overall Indirect Tax practice, and a common EHT question we get is whether two corporations are “associated employers” for the tax.  Being associated is problematic, as it essentially makes each employer pay more than if they were unrelated. 

While this may seem like a straightforward bedrock question (is "Aco" associated with "Bco"), there is some confusion as to how the technical rules apply (even, it appears, at the Ontario Ministry of Finance (“MOF”) – at least based on some recent Ontario assessment positions that we have seen). 

Mechanics of the EHT

Taking Ontario as an example of an EHT regime (there are actually 7 provinces and territories with a form of the EHT in Canada), the tax imposed is technically an employer liability tax imposed on the total Ontario remuneration (payroll) paid to current and former employees.  

Under the Ontario Employer Health Tax Act ("EHTA"), “eligible employers” are able to claim an “exemption amount” of up to $1,000,000 per year when calculating their EHT liability.  This takes A LOT of employers outside of the scope of the EHTA!

However, whether an employer can fully benefit from this exemption depends on its "associated" status with other employers.

Generally, non-associated employers can receive the full exemption amount, while those who are associated must share (provided the total Ontario remuneration of either the employer or the group does not exceed $5,000,000 for the year, among other conditions).

“Associated Employers” Rules

The rules for determining whether two employers are “associated” follow the “association rules” in the Income Tax Act.  These complex rules are largely based on corporate control and can have some very counter-intuitive results! 

For example, some companies with no financial or direct organizational ties between one another may meet the test for being “associated”, while others owned by related individuals may not!

A common situation that is easily misunderstood is where one corporation is “connected” to another through a third corporation. Ultimately, the determination of whether such corporations are associated for EHT purposes depends on factors including:

-          Organizational structure;

-          Share ownership; or

-          De Facto control.

Why do I care?

Although the EHT is generally a small tax (i.e., capped at under 2% per year in Ontario), penalties and interest can quickly add up. 

Misstatements related to the EHT (like errors in claiming the exemption amount) can go unnoticed for years.  With the Ministry of Finance’s apparent renewed recent focus on EHT audits (see our prior blogs here and here), knowing if you are “associated” with another employer can help avoid unexpected tax liabilities. 

Takeaways

Determining whether two corporations are “associated employers” for EHT purposes depends on the facts.  Given the complexity of the association rules, businesses should carefully evaluate their status to ensure they correctly apply any exemptions and to avoid unexpected liabilities should the Ministry of Finance come knocking.

For help with EHT assessments, click here. 

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