Published: January 2008
Content last reviewed: October 2009
ISBN: 978-1-4249-4458-3 (Print), 978-1-4249-4459-0 (PDF), 978-1-4249-4460-6 (HTML)
This publication is provided as a guide only. It is not intended as a substitute for the Employer Health Tax Act and Regulations.
This bulletin will assist employers in determining what amounts are subject to Employer Health Tax (EHT).
EHT is payable by employers who pay remuneration:
An employee is considered to report for work at a permanent establishment of an employer if the employee comes to the permanent establishment in person to work. If the employee does not come to a permanent establishment in person to work, the employee is considered to report for work at a permanent establishment if he or she may reasonably be regarded as attached to the permanent establishment. For more information on this topic, please see Information Bulletin entitled Permanent Establishment.
Employee stock options are granted under an agreement to issue securities, whereby a corporation provides its employees (or employees of a non-arm's length corporation) with a right to acquire securities of either of those corporations.
The term securities refers to shares of the capital stock of a corporation or units of a mutual fund trust.
Remuneration as defined in subsection 1(1) of the Employer Health Tax Act includes all payments, benefits and allowances received, or deemed to be received by an individual that, by reason of sections 5, 6 or 7 of the federal Income Tax Act (ITA), are required to be included in the income of an individual, or would be required if the individual were resident in Canada.
Stock option benefits are included in income by reason of section 7 of the federal ITA. Employers are therefore required to pay EHT on stock option benefits.
If a stock option is issued to an employee by a corporation not dealing at arm's length (within the meaning of section 251 of the federal ITA) with the employer, the value of any benefit received as a result of the stock option is included in remuneration paid by the employer for EHT purposes.
An employer is required to pay EHT on the value of all stock option benefits arising when an employee exercises stock option(s) during a period when his or her remuneration is subject to EHT. This includes stock options that may have been granted while the employee was reporting for work at a non-Ontario PE of the employer.
An employer is not required to pay EHT on the value of stock option benefits arising when an employee exercises stock option(s) while reporting for work at a PE of the employer outside Ontario.
An employer is required to pay EHT on the value of stock option benefits arising when an employee who exercises stock option(s) does not report for work at a PE of the employer but is paid from or through a PE of the employer in Ontario.
An employer is required to pay EHT on the value of stock option benefits of a former employee if the former employee's remuneration was subject to EHT on the date the individual ceased to be an employee.
An employee who exercises a stock option to acquire securities is required to include in employment income a benefit determined under section 7 of the federal ITA.
If the employer is a CCPC within the meaning of subsection 248(1) of the federal ITA, the employee is considered to have received a taxable benefit under section 7 of the federal ITA at the time the employee disposes of the shares.
Employers are required to pay EHT at the time the employee (or former employee) disposes of the shares.
Where employee stock options are issued by a CCPC, but are exercised by the employee after the company has ceased to be a CCPC, the value of the benefit will be included in remuneration for EHT purposes at the time the employee disposes of the securities.
Any taxable benefit resulting from an employee exercising stock options on securities that are not of a CCPC, including publicly-listed securities or securities from a foreign-controlled corporation, must be included in employment income at the time the options are exercised. EHT is payable in the year that the employee exercises the stock options.
For federal income tax purposes only, an employee can defer taxation of some or all of the benefit arising from exercising stock options to acquire publicly-listed securities until the time the employee disposes of the securities.
The federal deferral of taxation on stock option benefits is not applicable for EHT purposes. Employers are required to pay EHT on stock option benefits in the year that the employee exercises the stock options.
For a limited time, employers who directly undertake scientific research and experimental development and meet the eligibility criteria are exempt from paying EHT on stock option benefits received by their employees.
For CCPCs, the exemption is available on employee stock options granted before May 18, 2004, provided that the subject shares are disposed of or exchanged by the employee after May 2, 2000, and on or before December 31, 2009.
For non-CCPCs, the exemption is available on employee stock options granted before May 18, 2004, provided that the options are exercised after May 2, 2000, and on or before December 31, 2009.
All stock option benefits arising from employee stock options granted after May 17, 2004, are subject to EHT.
To be eligible for this exemption for a year, the employer must meet all of the following eligibility criteria in the taxation year of the employer preceding the taxation year that ends in the year:
For example, if the employer meets all of the above eligibility criteria in its taxation year ending June 30, 2001, it is eligible to claim the EHT exemption for the 2002 year.
Start-up companies that do not have a preceding taxation year can apply qualifying tests to their first taxation year. The scientific research and experimental development performed in their first taxation year will determine their eligibility for the first and second years on which EHT is payable.
In the first taxation year ending after an amalgamation, the employer can apply the qualifying tests to the taxation year of each of the predecessor corporations that ended immediately before the amalgamation.
Eligible expenditures are those incurred by the employer in directly undertaking scientific research and experimental development that qualify for the research & development (R&D) super allowance under the Corporations Tax Act (Ontario).
Contract payments received by the employer for performing R&D for another entity are included as eligible expenditures. Contract payments made by the employer to another entity for R&D performed by the other entity are not included as eligible expenditures of the employer.
Specifically, eligible expenditures of the employer for a taxation year are calculated as (A+B−C), where:
Specified eligible expenditures of the employer for a taxation year include:
The employer's total expenses are determined in accordance with generally accepted accounting principles (GAAP), excluding extraordinary items. Consolidation and equity methods of accounting are not to be used.
An employer's total revenue is the gross revenue determined in accordance with GAAP (not using the consolidation and equity methods of accounting), less any gross revenue from transactions with associated corporations having a PE in Canada or partnerships in which the employer or the associated corporation is a member.
The employer's adjusted total revenue for a taxation year is the total of the following amounts:
Eligible expenditures, total expenses, and total revenue are extrapolated to full-year amounts where there are short or multiple taxation years in a calendar year.
If a partner is a specified member of a partnership (within the meaning of subsection 248(1) of the federal ITA), the share of eligible expenditures, total expenses and total revenue of the partnership attributable to the partner is deemed to be nil.
|R&D intensive||Non-R&D intensive|
|Stock options granted before May 18, 2004||
Stock options granted
|Exempt from EHT if the securities are disposed of after May 2, 2000, and on or before December 31, 2009. Otherwise, EHT is payable when securities are disposed of by the employee.||No exemption. Same as non-R&D intensive. EHT is payable when securities are disposed of by the employee.||EHT is payable when securities are disposed of by the employee.|
Non-CCPC public and private corporations
|Exempt from EHT if the options are exercised after May 2, 2000 and on or before December 31, 2009. Otherwise, EHT is payable when stock options are exercised.||No exemption. Same as non-R&D intensive. EHT is payable when stock options are exercised (federal income tax deferral rule does not apply for EHT purposes).||EHT is payable when stock options are exercised (federal income tax deferral rule does not apply for EHT purposes).|
Contact the Ontario Ministry of Finance at:
To obtain a written interpretation on a specific situation not addressed in this publication, please send your request in writing to:
Ministry of Finance
Advisory Services and Program Policy Branch
Income Tax Related Programs Section
Employer Health Tax
33 King Street West, 3rd Floor
Oshawa ON L1H 8H5
Other publications which provide further details on this topic include: