EMPLOYER HEALTH TAX: RELATED PARTY RULES

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EMPLOYER HEALTH TAX: RELATED PARTY RULES

INCOME TAX RULES REIGN, BUT AS INTERPRETED BY ONTARIO?

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Ontario’s Employer Health Tax Act (the “Act” and the “EHT”) regime contains important associated-employer and related-party rules impacting things like EHT Exemptions and the calculation of payroll thresholds, as well as ultimate EHT liability. While the rules borrow heavily from Income Tax Act (“ITA”) definitions and concepts, the application of the rules in the EHT context is not always straight-forward and often influenced by administrative interpretation.

In this Indirect Tax Report, we review the EHT associated-employer variation of these rules and highlight practical difficulties arising when income tax concepts are applied for provincial purposes.

EHT Framework – What is it?

At its core, Ontario’s EHT is a payroll tax imposed on remuneration paid to employees. While the EHT regime generally applies to all employers paying Ontario remuneration, eligible employers with annual payroll below $5 million may claim an exemption (currently for the first $1 million in remuneration paid), which can significantly reduce (or eliminate) EHT liability for smaller businesses.

However, things get complicated quickly when multiple entities are involved. Where employers are “associated”, the annual EHT exemption must either be shared or can be lost entirely (e.g., where payroll exceeds $5 million between them). There can also be unexpected situations where a small business with limited payroll can end up owing EHT due to its connections to others.

Associated Employers & Related Parties

For the purpose of determining “association”, the EHTA adopts the association rules from the ITA (see subsection 1(5.1)). These rules are grounded in concepts of legal and de facto control as well as relationships between shareholders and corporations, and connections between related individuals.

“Related persons” can include individuals connected by blood or marriage, as well as certain individuals related to corporate entities.

Further, corporations may be associated where:

1. One corporation controls another;
2. Both are controlled by the same person or related group; and
3. They are each associated to a third corporation, or through related individuals, in a way that satisfies the statutory tests.

Practically, these rules capture more structures than expected, including re-organized corporate groups and family-owned businesses operating through commonly controlled corporations.

Differing Audit Outcomes?

On audit, one sees EHT rules based on the ITA producing different outcomes than perhaps expected from a strict ITA perspective, with Ontario often challenging exemption claims where payroll is spread across related entities, even in the absence of clear technical association. EHT planning and advice is therefore often critical, as would be audit risk mitigation strategies like good record-keeping of (1) ownership and shareholding; (2) control relationships; and (3) payroll allocation.

Takeaways

Ontario’s EHT has related party rules importing concepts from the ITA. On audit, these rules are often applied differently than expected because of local interpretations. Where merited, EHT assessments can be challenged with the help of Experienced EHT Counsel.

For help with an EHTA matter, please click here.