Are vacation and bonus payments included in severance payments subject to Employer Health Tax?

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Interpretation Letter 08-0125, November 2008

I refer to your fax letter dated July 10, 2008, but received by us on September 19, 2008, regarding whether certain vacation and bonus payments, included in severance payments made by Company A, are subject to the Employer Health Tax (EHT).

Employers are required to pay EHT on total Ontario remuneration paid to both employees and former employees. "Remuneration" for EHT purposes includes payments, benefits and allowances which are required to be included in an individual's income by reason of section 5, 6 or 7 of the Income Tax Act (Canada) (ITA). Therefore, amounts required to be included in income as a retiring allowance, under subparagraph 56(1)(a)(ii) of the ITA, are not taxable for EHT purposes.

The federal Income Tax Folio S2-F1-C2 Retiring Allowances states that to qualify as a retiring allowance, a payment must be in recognition of long service or in respect of loss of an office or employment. The bulletin specifies that unused vacation pay does not qualify as a retiring allowance. Similarly, in our opinion, a prorated bonus would be considered income from employment in contrast to a payment in recognition of long service. Therefore, accrued vacation pay and prorated bonuses are considered remuneration which do not qualify as a retiring allowance and are taxable for EHT purposes.

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