What is the Employer Health Tax (EHT) in Ontario?

If you own a business in Ontario, you may be wondering if you are required to pay the Employer Health Tax. This depends on, among other things, the applicable government regulations and the size of your annual payroll.

While some small businesses in Ontario are exempt from this tax, understanding your responsibilities is critical to ensuring tax compliance and avoiding potential penalties.

Our experts in tax and business accounting explain the nuances of this financial contribution and its impact on Ontario's economic fabric.

What is the Employer Health Tax (EHT)?

Introduced in 1990, the Employer Health Tax (EHT) plays an important role in Ontario's health care system and is a key source of funding for the province's health services.

This tax is designed to be progressive, with rates varying based on a company's total payroll. This structure is designed to balance the tax burden by exempting small businesses to reduce their financial burden, while ensuring that larger businesses make a significant contribution to health care funding.

Funds raised through the Employer Health Tax will be used directly to fund health services, ensuring that companies play a direct role in supporting public health.

Which businesses are subject to the Employer Health Tax?

All Ontario businesses with an employer-employee relationship whose annual payroll exceeds the exemption threshold are potentially subject to the Employer Health Tax, with rates increasing as payroll increases. This means you are liable to pay Employer Health Tax if:

• You have employees who work at your permanent establishment in Ontario;
• You pay a remote employee and your permanent place of business is in Ontario;
• Your Ontario payroll exceeds the allowable tax exemption.

If your company meets the criteria set forth in the EHT Act and your annual payroll does not exceed the exemption threshold, you may be exempt from paying all or part of the Employer Health Tax.

Thresholds and exemptions

The Ontario government allows eligible employers to benefit from an EHT exemption on the first $1 million of their payroll. In 2020, this threshold was re-evaluated (from $490,000 to $1,000,000) in response to the exceptional situation caused by COVID-19. This reduced the tax burden on small businesses, recognizing their importance to the economy, while maintaining adequate funding for health services. 

As a result, you may apply for the tax exemption provided by the Employer Health Tax if : 

• You meet the requirements set forth in the Employer Health Tax Act;
• You pay corporate income tax;
• Your company's Ontario payroll for the year - including that of affiliated employers - does not exceed $5 million;
• You operate as a registered charity, without influence from any government agency, and without any municipal councillors on your board of directors.

If you meet one or more of these criteria, you may be able to claim an exemption from some or all of this tax.

Future EHT revaluations

The EHT thresholds and rates are periodically reassessed by the Ontario government to reflect changes in the economy and the funding needs of the health care system. According to the Ontario government's official source, the next reassessment is scheduled for January 1, 2029.

Keep in mind that tax rules change, sometimes without notice. The assistance of a chartered accountant such as T2inc.ca can keep you abreast of the latest tax changes and prepare your corporate income tax returns for you.

Impact of reassessments on corporate tax liabilities

Reassessments of EHT thresholds and rates can have a significant impact on corporate tax liabilities. For example, an increase in the exemption threshold could reduce the number of companies subject to the Employer Health Tax, while a change in tax rates would affect the amount of tax payable by those above the threshold.

These changes are important for business tax and financial planning.

Adaptation Strategies for Ontario SMEs

To effectively navigate the changing Employer Health Tax landscape, companies must adopt proactive tax planning strategies. This may include regularly reviewing payroll, exploring cost reduction opportunities, and consulting with tax professionals to fully understand the implications of the Employer Health Tax adjustments.

Active regulatory monitoring is also critical to anticipate and respond to legislative changes.

How is the EHT calculated?

To calculate the amount due, multiply your annual Ontario payroll (after deducting your exemption) by your tax rate (based on your Ontario payroll before deducting any exemptions).

For example, if you are an eligible employer with an Ontario payroll of $2,500,000 per year, you can claim the tax exemption on the first $1,000,000 and pay tax on the remaining $1,500,000, calculated at a tax rate of 1.95%.

A complete list of tax rates based on annual payroll is available on the Ontario government website. To make sure your calculations are accurate, you can also hire an accounting service. The T2inc.ca team is here to help you save time and money!

How do I sign up and open an EHT account?

If you do not qualify for the exemption, or if you qualify but your payroll exceeds the amount of the exemption, you must register your business and open an EHT account.

To register your Ontario business with the Employer Health Tax, you'll need the following information:

• Business name
• Legal name
• Business address
• Mailing address
• Telephone and fax numbers
• Name of contact person or agent
• Start date of payroll
• Payroll Frequency
• Federal Business Number (BN)
• Employer type (e.g., partner, multiple accounts, or government employer)

Paying the Employer Health Tax

Once you've registered your business for EHT, the Ontario government will send you an annual return with a return envelope.

It is your responsibility to file your annual EHT return online, in person or by mail by March 15 to the following address

Ministry of Finance

33 King St W

P.O. Box 620

Oshawa ON L1H 8E9

Maintenance of Records and Books

The Ontario government requires that the accuracy of Employer Health Tax reporting requires the ongoing maintenance of books of account and supporting documentation. Business owners in Ontario must ensure that their corporate tax records are accurate and up to date to confirm compliance with EHT legislation and regulations.

Please note that choosing a good business accountant can help.

Don't Overlook the Strategic Importance of the EHT and Comply with this Ontario Tax

The EHT is more than a tax; it's an investment in the health and well-being of the Ontario community. By contributing to the funding of health care services, employers play a vital role in maintaining a strong and responsive health care system. This tax underscores the importance of corporate social responsibility and encourages a collective approach to supporting critical health care infrastructure.

By understanding the nuances of this tax, you'll be able to better manage your tax obligations, while making a significant contribution to the well-being of Ontario society.