Tax Exemption

Basic rules

Starting with the 2020 tax year, eligible employers are exempt from Employer Health Tax (EHT) on the first $1 million of total Ontario renumeration.

The EHT exemption is indexed to inflation every five years and the next adjustment had been scheduled for 2024. Given the doubling of the exemption threshold starting in 2020, the government moved the next scheduled adjustment for inflation to January 1, 2029.

Employers with annual Ontario payroll over $5 million cannot claim the exemption.

Only one annual exemption is available for an associated group of employers. Employers that are associated at any time during the year must take into account the total Ontario remuneration of each associated entity in determining whether they can claim the exemption. When the combined total Ontario remuneration of all the employers that are associated exceeds $5 million, these employers are not eligible for the exemption.

Eligible employers

Eligible employers generally include:

  • private‑sector employers
  • organizations that receive financial assistance from any level of government but are not under the control of government
  • Crown corporations that are subject to federal income tax under Part I of the federal Income Tax Act.

Employers may be corporations, individuals, partnerships or trusts.

Claiming the exemption

The exemption is normally claimed by reducing tax instalments made during the year by the exemption amount allowed. No exemption amount should be taken by an employer if the employer expects to exceed the $5 million exemption threshold, or is a member of an associated group of employers of which the total combined payroll exceeds $5 million for the year, or only a prorated amount should be taken if no employer in the group operated for the full year.

Starting in 2021, eligible employers are not required to remit tax instalments until the cumulative remuneration exceeds the $1.2 million instalment threshold.

Final adjustments to the exemption amount taken during the year should be made at the time of filing the annual return.

Registered charities

Eligible employers that are registered charities may claim the tax exemption regardless of the amount of their payroll.

Eligible employers who are associated with a registered charity are not required to include the payroll of the registered charity when determining whether the combined payroll of all associated employers is less than $5 million. The associated group is not required to share its exemption with the registered charity and is not required to include the registered charity on its Associated Employers Exemption Allocation Form.

A registered charity that has two or more qualifying charity campuses may claim an exemption amount for each qualifying charity campus. More information on the EHT rules for registered charities.

Example one: charity associated with employer

Boss Co and Daycare are associated with each other. Boss Co is an eligible employer for the full year with annual payroll of $3 million. Daycare is a registered charity for the full year with annual payroll of $6 million.

Since Daycare is a registered charity for the full year, it is eligible for a $1 million exemption regardless of the amount of remuneration it paid during the year.

Boss Co is not required to include Daycare’s payroll for the purpose of determining exemption eligibility. Boss Co is eligible for a $1 million exemption since its payroll of $3 million is below the $5 million threshold.

Associated employers

Members of an associated group of employers must share the tax exemption. To be eligible, the combined total Ontario remuneration of the associated group must be equal to or less than $5 million.

The tax exemption may be allocated to just one member of the associated group, or it may be shared with the other members.

Employers are associated if they are associated with each other at any time in the year.

Associated employers are connected by ownership or by a combination of ownership and relationships between individuals. Individuals are related either through blood, marriage or adoption. The rules for associated corporations under section 256 of the federal Income Tax Act are used to determine whether or not employers are associated for EHT purposes. Although these rules refer to corporations, their application is extended under the Employer Health Tax Act to include individuals, partnerships and trusts.

Eligible employers that are members of an associated group of employers are required to enter into an agreement to allocate the tax exemption for the year. At least one member of the group is required to complete the Associated Employers Exemption Allocation form and submit it to the ministry by the return due date. The exemption amount for all members of the group will be denied if a completed form is not received. More information on associated employers.

Example one: change in association status partway through the tax year

Yellow Inc. and Blue Inc. are eligible employers, monthly filers and are not associated with each other or any other employers. On October 15, 2021, Green Inc. acquires both Yellow and Blue and, in doing so, Yellow and Blue become part of an associated group with each other and Green as of October 15, 2021 (date of acquisition). Yellow and Blue continue to operate under the same business names and numbers after the acquisition.

Since Yellow and Blue were not associated employers at the beginning of the 2021 tax year, each employer had accounted for the $1 million EHT exemption when filing their instalments.

Yellow and Blue become part of an associated group with the buyer, Green, and any other businesses with which Green is associated in the year of acquisition (2021 in this case). They are associated with each other for the whole year if they became associated at any time during the year. Eligible employers who are associated with each other at any time in a year must share one tax exemption amount. Since Yellow and Blue became part of an associated group with Green in 2021, they must all share one tax exemption for the 2021 tax year. However, if the total combined payrolls of the associated group are above $5 million for 2021, then none of the businesses may claim an exemption for 2021.

Because their total combined payrolls are below $5 million, Yellow, Blue and Green are required to enter into an agreement to allocate the tax exemption amount amongst themselves for the year. The group decided to allocate the exemption to Green.

Because Yellow and Blue each already accounted for the EHT exemption on instalments prior to being acquired by Green, an adjustment will need to be made in the month following the change in status to associated to re‑allocate the one exemption among the members of the associated group and “catch up” EHT payments made.

Both Yellow and Blue had claimed $1 million of exemption on their previous instalments, and to “catch up” both employers are required to report the exemption remuneration of $1 million on their October 2021 instalment form in addition to the regular October remuneration (the instalment would be due on November 15, 2021). To avoid penalty and interest charges, the “catch up” payment for monthly filers must be received by the ministry on the next instalment due date. If the “catch up” is not reported until the annual return is filed, penalty and interest may be assessed for employers that would have been required to file monthly instalments once the $1 million “catch up” remuneration is added (i.e., if the Total Ontario Remuneration greater than $1.2 million).

One member of the associated group will need to file the Associated Employer Exemption Allocation form by the annual return due date.

Example two: over the exemption threshold

Kings Ltd and Queens Ltd are associated with each other. Both are eligible employers for the full year. Kings Ltd’s payroll is $3 million for the year. Queens Ltd’s payroll is $4 million for the year.

Kings Ltd and Queens Ltd are not eligible for the $1 million exemption because their combined total Ontario remuneration of $7 million exceeds the exemption threshold of $5 million.

If Kings and Queens accounted for an allocated exemption on their instalments payments (because they did not know if their combined payroll would exceed $5 million for the year), the exemption remuneration must be included on the monthly instalment immediately following the month where $5M combined remuneration was exceeded. Failure to “catch up” the exemption remuneration on the subsequent instalment may result in penalty and interest being assessed.

Example three: below the exemption threshold

Drums Co, Flutes Co and Horns Co are associated with each other. All are eligible employers for the full year. Drums Co, Flutes Co and Horns Co each has payroll of $1 million.

Drums Co, Flutes Co and Horns Co are eligible for the $1 million exemption because the combined total Ontario remuneration of the group is $3 million. Drums Co, Flutes Co and Horns Co may share the exemption in accordance with their agreed upon allocation.

No instalments are required on any of the accounts as their individual payrolls are under the instalment threshold of $1.2 million.

Example four: part‑year new employers

If a part‑year employer is a member of the associated group, the calculation of the exemption threshold for the group is based on the group member that has been an eligible employer the longest in the year.

Sweet Ltd, Spicy Ltd and Sour Ltd are associated with each other. Sweet Ltd is an eligible employer for the full year. Spicy Ltd is also an eligible employer and begins operations on April 1. Sour Ltd becomes an eligible employer on September 1. Sweet Ltd’s payroll is $2 million. Spicy Ltd’s payroll is $1.5 million. Sour Ltd’s payroll is $1 million.

The exemption threshold for the group would be based on Sweet Ltd’s exemption threshold that is $5 million since Sweet Ltd has been an eligible employer for the entire year.

Total allowable exemption for the group = $1 million
Maximum exemption for Sweet Ltd = $1 million
Maximum exemption for Spicy Ltd = $753,425 ($1 million × 275/365 days)
Maximum exemption for Sour Ltd = $334,247 ($1 million × 122/365 days)

Sweet Ltd, Spicy Ltd and Sour Ltd are eligible for the exemption because the combined total Ontario remuneration of the associated group is $4.5 million. Sweet Ltd, Spicy Ltd and Sour Ltd may share the $1 million exemption but cannot allocate all of the exemption to either Spicy Ltd or Sour Ltd. Since Spicy Ltd and Sour Ltd are part‑year eligible employers, the maximum that Spicy Ltd can claim is $753,425 and the maximum that Sour Ltd can claim is $334,247. However, regardless of the individual maximum amounts, the total claim for the associated group cannot exceed $1 million for the year.

Example five: ceasing business

Pie Co and Apple Co are associated with each other. Apple Co ceases operations on March 31. Pie Co’s payroll is $3.5 million for the year. Apple Co’s payroll is $1 million for the period January through March.

The exemption threshold for this group is $5 million since Pie Co is an eligible employer for the entire year.

Total allowable exemption for the group = $1 million
Maximum exemption for Pie Co = $1 million
Maximum exemption for Apple Co = $246,575 ($1 million × 90/365 days)

Pie Co and Apple Co are eligible for the exemption because the combined total Ontario remuneration of the associated group is $4.5 million. Pie Co and Apple Co may share the $1 million in accordance with their agreed upon allocation. Since Apple Co is a part‑year employer, the maximum exemption that it can claim is $246,575.

Note: Apple Co cannot claim any exemption on its Final Return, which is due within 40 days of it ceasing operations, because it will not know at that time if the combined total Ontario remuneration of the group will exceed the $5 million exemption threshold. However, Apple Co may file an amended return if any exemption is allocated to it by the group at year end.

Part year employers

An eligible employer that commenced or ceased operations, amalgamated, or filed for bankruptcy after the beginning of the year must prorate the $5 million exemption threshold and the $1 million exemption amount, based on the number of days in the calendar year that the part‑year employer is an eligible employer and has a permanent establishment in Ontario.

In the event of bankruptcy, the proration calculation does not include the date of bankruptcy.

If all or any members of your associated group were part‑year employers, you must prorate the exemption threshold and exemption amounts. The exemption threshold amount for the group will be determined by the member who had the greatest number of days as an eligible Ontario employer with Ontario payroll and a permanent establishment in Ontario for that year. Even if the associated group combined were eligible employers from January 1 to December 31, the exemption threshold and exemption amounts must be prorated.

Members of an associated group that amalgamate during the year should contact their local Ministry of Finance tax office for further information.

Example six: part‑year associated employer

Name # of days as eligible employer Remuneration for 2020 (366 days) Prorated exemption threshold Maximum allocated exemption
ACo 183 $2,000,000 $2,500,000 $500,000
BCo 30 $450,000 $409,836 $0
Group   $2,450,000 $2,500,000 $500,000

Conclusion

Because the group combined remuneration is below the calculated prorated exemption threshold, exemption is available for allocation. Individually BCo’s remuneration exceeds their calculated prorated exemption threshold, so no exemption may be allocated to BCo. ACo may claim the available maximum exemption of $500,000

Example seven: part‑year eligible employer

Apple Pie Enterprises is an eligible employer that is not associated with any other employer. Apple Pie Enterprises begins operating in March but did not have any payroll until July 1. Its payroll from July 1 to December 31 is $2 million.

The exemption threshold and the exemption amount will be prorated from July 1.

Exemption threshold = $2,520,548 ($5,000,000 × 184/365 days)
Maximum exemption = $504,110 ($1 million × 184/365 days)

Apple Pie Enterprises is eligible for a maximum exemption in the amount of $504,110 because its total payroll of $2 million during the period July through December is below its allowable exemption threshold of $2,520,548.

Example eight: amalgamation

Rob Ltd and Bert Ltd are eligible employers. Rob Ltd and Bert Ltd are not associated with each other or any other employer. On March 31 Rob Ltd and Bert Ltd amalgamated to form Robert Ltd. Robert Ltd is not an associated employer. Rob Ltd’s payroll for the period January through March is $1 million. Bert Ltd’s payroll for this same period is $1.5 million. Robert Ltd’s payroll for the period April through December is $3.5 million.

Exemption thresholds for both Rob Ltd and Bert Ltd = $1,232,876 ($5,000,000 × 90/365 days)
Maximum exemptions for both Rob Ltd and Bert Ltd = $246,575 ($1 million × 90/365 days)
Exemption threshold for Robert Ltd = $3,767,123 ($5,000,000 × 275/365 days)
Maximum exemption for Robert Ltd = $753,425 ($1 million × 275/365 days

Rob Ltd is eligible for a maximum exemption of $246,575 because its total payroll of $1 million is below its allowable exemption threshold of $1,232,876.

Bert Ltd is not eligible for the exemption because its total payroll of $1.5 million exceeds its allowable exemption threshold of $1,232,876.

Robert Ltd is eligible for a maximum exemption of $753,425 because its total payroll of $3.5 million is below its allowable exemption threshold of $3,767,123.

For complex situations (i.e., changes in control) or assistance please contact the Ministry of Finance at 1 866 ONT‑TAXS (1 866 668‑8297).

Multiple account employers

A multiple account employer is an employer that has more than one EHT account number set up for the same legal entity.

A multiple account employer that is an eligible employer and whose total Ontario remuneration is less than the exemption threshold can allocate the exemption to any of its multiple accounts, as long as it does not exceed the total exemption amount allowed for the employer for the year.

Tax exemption rules (from January 1 to December 31, 2019)

Eligible employers were exempt from EHT on the first $490,000 of total Ontario remuneration each year. The exemption was eliminated for private‑sector employers with annual Ontario payrolls over $5 million. Eligible employers who are registered charities could claim the exemption even if their payroll exceeds $5 million.

Tax exemption rules (from January 1, 2014 to December 31, 2018)

Eligible employers were exempt from EHT on the first $450,000 of total Ontario remuneration each year. The exemption was eliminated for private‑sector employers with annual Ontario payrolls over $5 million. Eligible employers who are registered charities could claim the exemption even if their payroll exceeds $5 million.

Tax exemption rules (before January 1, 2014)

Eligible employers were exempt from EHT on the first $400,000 of total Ontario remuneration each year. There was no exemption threshold.

Request an interpretation

To obtain an interpretation on a specific situation not addressed, please send your request by:

For more information

Visit ontario.ca/eht or contact the Ministry of Finance at 1‑866‑ONT‑TAXS (1‑866‑668‑8297) or 1‑800‑263‑7776 for teletypewriter (TTY).

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