In Ontario, the Employer Health Tax (EHT) is a mandatory payroll tax. However, eligible small businesses benefit from a generous exemption: you do not pay EHT on the first $1 million of your annual Ontario payroll. Critically, if you own multiple “associated” corporations, they must share this single $1 million exemption limit among the entire corporate group.
Growing a business and hiring new staff is an exciting milestone. 💼 Whether you run a bustling medical clinic in Toronto, a manufacturing plant in Mississauga, or a tech firm in Ottawa, bringing on employees means taking on complex payroll responsibilities. While most employers focus on federal deductions like CPP and EI, doing business in Ontario means you must also navigate the provincial Employer Health Tax (EHT). This tax is designed to help fund Ontario’s publicly funded healthcare system.
For small and medium-sized enterprises (SMEs), the Ontario Ministry of Finance provides a massive relief mechanism. Recognizing that taxing small payrolls stifles job creation, the government permanently increased the EHT exemption threshold to $1 million in total Ontario remuneration. This means a vast majority of small businesses effectively pay zero EHT. However, as your company grows, or if you structure your business across multiple holding and operating companies, calculating your eligibility for this exemption becomes highly technical and fraught with legal pitfalls.
Step-by-Step Process in Ontario
Managing your EHT obligations requires precise payroll tracking. 📍 Most applicants in this province rely on an experienced corporate accountant or payroll provider to monitor these thresholds. Here is how you generally calculate and claim your EHT exemption.
Step 1: Calculating Total Ontario Remuneration
Before claiming an exemption, you must know your total payroll. Remuneration under the EHT Act is incredibly broad. It includes standard salaries and wages, bonuses, taxable benefits, stock options, and directors’ fees paid to employees who report to an Ontario permanent establishment. You must tally up every single dollar of gross payroll issued throughout the calendar year to see if you breach the $1 million mark.
Step 2: Identifying Associated Corporations
This is where many business owners make costly mistakes. 🏢 If you own three separate companies (e.g., a real estate holding company, an operating company, and a logistics company), the Ministry of Finance treats them as “associated employers.” You do not get a $1 million exemption for each company. Instead, you get a single $1 million exemption that must be legally shared among the entire associated group.
Step 3: Allocating the Exemption Amount
If you are part of an associated group, you must formally agree on how to split the exemption. Your accountant will usually allocate the highest exemption portion to the company with the largest payroll. You must document this agreement by filing a specific allocation form with the Ontario Ministry of Finance. If you fail to file this allocation, the government can deny the exemption entirely and charge EHT on your first dollar of payroll.
Step 4: Registering for an EHT Account
Even if you are fully exempt, you may still need to register in certain situations, but generally, you are only legally required to register for an EHT account with the Ministry of Finance if your total annual Ontario payroll exceeds the $1 million exemption threshold. 📰 If you are eligible for the exemption and your payroll remains below $1 million, you do not have to pay EHT, register an account, or file returns. Registration is free and can be completed online through the Ministry of Finance’s ONT-TAXS online portal, by calling 1-866-ONT-TAXS, or in person at a ServiceOntario centre.
Step 5: Filing the Annual Return and Paying Remittances
If your payroll does cross the $1 million mark, you must pay tax on the excess amount. The tax rate scales from 0.98% up to a maximum of 1.95%. You must file an Annual Return by March 15th of the following year. Furthermore, if your annual Ontario payroll exceeds $1.2 million, the Ministry of Finance requires you to make mandatory monthly instalment payments throughout the year.
How Much Does it Cost in Ontario?
The cost of EHT scales progressively based on the size of your workforce. 💰 For payrolls over $400,000, the top rate of 1.95% applies to every dollar above your $1 million exemption. Here is a general breakdown of the financial impact in CAD:
- Total Payroll Under $1,000,000: The EHT cost is exactly $0.
- Total Payroll of $1,500,000: You pay 1.95% on the $500,000 excess, resulting in an EHT bill of $9,750.
- Accounting Fees: Having a CPA prepare and file your annual EHT return and allocate associated exemptions typically costs $300 to $800.
| Ontario Payroll Amount | Applicable Exemption | Estimated EHT Owed (CAD) |
|---|---|---|
| $800,000 | Fully Exempt | $0 |
| $1,200,000 | First $1M Exempt | $3,900 (1.95% of 200k) |
| $6,000,000 (Large Biz) | Zero (Exemption phased out) | $117,000 (1.95% of total) |
How Long Does the Process Take?
Managing EHT is an annual cycle. 🕒 Registering for a new EHT account with the Ontario Ministry of Finance generally takes 2 to 4 weeks for them to issue your account number. Once registered, tracking the payroll is an ongoing monthly process. The absolute deadline to file your final EHT Annual Return and pay any outstanding balances is March 15th of the calendar year following the payroll year.
Frequently Asked Questions (FAQ)
Do large businesses get the $1 million exemption?
No. Under Ontario tax law, if your total gross payroll (including associated companies) exceeds $5 million, the $1 million exemption is entirely eliminated. You will be required to pay the full 1.95% EHT on the very first dollar of your payroll.
Are independent contractors included in EHT?
Generally, no. EHT only applies to individuals who are in a true employer-employee relationship (meaning they receive a T4 slip). Payments made to legitimate independent contractors or freelancers (who issue you an invoice and handle their own taxes) are excluded from your EHT remuneration calculations.
What if my employees work remotely outside of Ontario?
EHT applies to employees who report for work at a permanent establishment in Ontario. If you have employees who permanently work from home in Alberta or Nova Scotia, and they report to a local office there (or are not tied to an Ontario office), their wages are generally not subject to Ontario EHT.
Are registered charities exempt from EHT?
Registered charities receive special treatment under the EHT Act. They are entitled to a $1 million exemption for every single registered location they operate in Ontario, rather than having to share one exemption across the entire organization. This allows large charities to avoid massive EHT burdens.
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