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EHT in practice: eligible employers scenarios

Does XXXX Hydro Inc. qualify for the Employer Health Tax exemption?

Information and Disclaimer

*This interpretation letter was issued based on the specific circumstances or situation of a taxpayer or vendor and the law and tax policy in effect at the time the ruling was issued.

Specific facts relevant to your situation may change the application of the tax. In accordance with the Freedom of Information and Protection of Privacy Act, all confidential and identifying information has been removed from this interpretation letter.

Please be aware that any statute or policy referred to in this letter may have been superseded. Where a letter contains links to a publication, the link is to our current publication on that subject, regardless of the date that the ruling was originally issued, and the current publication may not be reflective of the information originally provided.

In no event shall the Government of Ontario be liable for any damages whatsoever arising out of, or in connection with, the use of the information contained herein.

Interpretation Letter* (March 2014)

I refer to our telephone conversation and your e-mail of XXXX, requesting a written explanation as to why XXXX Hydro Inc. is not eligible for the Employer Health Tax (EHT) exemption.

Facts

My understanding is that XXXX Hydro Inc. is

  • wholly owned by the municipality
  • exempt from federal income tax, and
  • required to pay ‘payments in lieu’ of federal income taxes (PILs).

Applied legislation

Pursuant to section 2.1 of the Employer Health Tax Act (EHTA), an eligible employer who is not associated with another employer is exempt from EHT on the first $490,000 of total remuneration paid if its remuneration for the year does not exceed $5 million. Eligible employers who are associated with other employers must allocate the exemption among members of the associated group.

Subsection 1(1) of the Employer Health Tax Act (EHTA) defines an eligible employer, in part, to mean an employer who is not:

(a)   a person in the public sector, as described in clauses 1(a) to (i) and section 2 of the Schedule to the Social Contract Act, 1993 and not subject to tax under Part I of the Income Tax Act (ITA) (Canada); or

(b)   a person that is exempt throughout the year from tax under Part I of the ITA under any of paragraphs 149(1)(a) to (d.6), (h.1), (o) to (o.2), (o.4) to (s.2) and (u) to (z) of that Act.

The Schedule to the Social Contract Act, 1993 provides, in part, that the public sector in Ontario consists of,

(a)   the corporation of every municipality in Ontario, every local board as defined by the Municipal Affairs Act, and every authority, board, commission, corporation, office or organization of person some or all of whose members, directors or officers are appointed or chosen by or under the authority of the council of the corporation of a municipality in Ontario; and

(b)   every corporation with share capital, at least 90% of the issued shares of which are beneficially owned by or for an employer or employers described in clauses (a) to (d), and every wholly-owned subsidiary thereof.

Under the Electricity Act, 1998, municipalities were required to incorporate their electrical utilities under the Ontario Business Corporations Act if they wished to continue participating in the electrical industry. The electricity assets of the local municipal electric utility had to be transferred to the new corporation, now called a local distribution company (LDC), by municipal transfer by-law. Each LDC operates on a commercial basis.

Each LDC and its affiliate corporations are generally exempt from federal income tax under subsection 149(1) of the ITA. Section 93 of the Electricity Act, 1998 requires corporations that are exempt under subsection 149(1) of the ITA to pay ‘payments-in-lieu’ of federal corporate taxes (PILs).

Since PILs are only payable by entities that are exempt from tax under the ITA, PILs are different from federal income tax. The fact that the amount of PILs payable would be equivalent to and computed in the same manner as federal income tax does not convert PILs into federal income tax for EHT purposes.

Conclusion

XXXX Hydro Inc. is a subsidiary of the municipality, is exempt from federal income tax under subsection 149(1)(d.3) of the ITA and is a member of the public sector by virtue of clause 1(f) of the Schedule to the Social Contract Act, 1993. Since members of the public sector are not eligible employers, XXXX Hydro Inc. is not eligible for EHT exemption.

Does Corporation A qualify for the Employer Health Tax exemption?

Information and Disclaimer

*This interpretation letter was issued based on the specific circumstances or situation of a taxpayer or vendor and the law and tax policy in effect at the time the ruling was issued.

Specific facts relevant to your situation may change the application of the tax. In accordance with the Freedom of Information and Protection of Privacy Act, all confidential and identifying information has been removed from this interpretation letter.

Please be aware that any statute or policy referred to in this letter may have been superseded. Where a letter contains links to a publication, the link is to our current publication on that subject, regardless of the date that the ruling was originally issued, and the current publication may not be reflective of the information originally provided.

In no event shall the Government of Ontario be liable for any damages whatsoever arising out of, or in connection with, the use of the information contained herein.

Interpretation Letter 09-0030, May 2009

We refer to your letter dated XXXXXX, requesting an interpretation on the definition of eligible employers who qualify for the Employer Health Tax (EHT) exemption, with respect to Corporation A.

Facts

From the information you provided, we understand that:

  • Corporation A is a separate entity under the Business Corporation Act
  • the City of XXXXXX is the sole shareholder of Corporation A
  • Corporation A operates under the direction and governance of seven people, who are appointed by the City of XXXXXX
  • three of the Board members are municipal councillors.

Applied legislation

Under the EHT Act, "eligible employer" includes an employer that is not,

(a) a person in the public sector, as described in clauses 1 (a) to (i) and section 2 of the Schedule to the Social Contract Act, 1993, and not subject to tax under Part I of the Income Tax Act (Canada)

(b) the Schedule to the Social Contract Act, 1993 under Clause 1, defines a public sector employer to include:

  • the corporation of every municipality in Ontario, every local board as defined by the Municipal Affairs Act, and every authority, board, commission, corporation, office or organization of persons some or all of whose members, directors or officers are appointed or chosen by or under the authority of the council of the corporation of a municipality in Ontario

Conclusions

Based on the information provided, it is our opinion that the directors of Corporation A’s Board are appointed under the authority of the corporation of a municipality (the City of XXXXXX) as described in clause 1(b) of the Social Contract Act, 1993. Corporation A is considered to be a member of the public sector. As a result, Corporation A is not an eligible employer for EHT purposes, and therefore is not eligible for the tax exemption.

Is Organization B an eligible employer and eligible for the Employer Health Tax exemption?

Information and Disclaimer

*This interpretation letter was issued based on the specific circumstances or situation of a taxpayer or vendor and the law and tax policy in effect at the time the ruling was issued.

Specific facts relevant to your situation may change the application of the tax. In accordance with the Freedom of Information and Protection of Privacy Act, all confidential and identifying information has been removed from this interpretation letter.

Please be aware that any statute or policy referred to in this letter may have been superseded. Where a letter contains links to a publication, the link is to our current publication on that subject, regardless of the date that the ruling was originally issued, and the current publication may not be reflective of the information originally provided.

In no event shall the Government of Ontario be liable for any damages whatsoever arising out of, or in connection with, the use of the information contained herein.

Interpretation Letter 09-0072, August 2009

We refer to your letter dated XXXXXX, regarding whether your client, Organization B, is an eligible employer for purposes of the annual exemption allowed under the Employer Health Tax Act ( EHT Act). I acknowledge receipt of Organization B’s authorization to deal with you in this matter.

Facts

From the information you provided, I understand that Organization B:

  • is a registered charity with one charitable number
  • is a corporation operating under Letters Patent in the Province of Ontario with a head office in the Municipality of XXXXXX
  • is a federation established by seven XXXXXX institutions in order to promote cooperation among themselves and with other XXXXXX institutions in Ontario
  • is not a XXXXXX institution and is not funded by the Government of Ontario
  • in the past has paid Employer Heath Tax (EHT) on the total remuneration of its employees because it was informed that it was not an eligible employer
  • is funded by an assessment of its members and other fundraising efforts.

Applied legislation

The EHT Act defines an eligible employer to mean, in part, an employer that is not a person in the public sector, as described in clauses 1(a) to (i) and section 2 of the Schedule to the Social Contract Act, 1993, and not subject to tax under Part I of the Income Tax Act (Canada ) for the year.

Clause 1(d) of the Schedule to the Social Contract Act, 1993 states that the public sector in Ontario consists of every university in Ontario and every college of applied arts and technology and post-secondary institution in Ontario whether or not affiliated with a university, the enrolments of which are counted for purposes of calculating annual operating grants entitlements.

Clause 1(g) of the Schedule to the Social Contract Act, 1993 states that the public sector in Ontario includes every corporation without share capital, the majority of whose members, directors or officers are members of, or are appointed or chosen by or under the authority of, an employer or employers described in clauses (a) to (d), and every wholly-owned subsidiary thereof.

The seven member XXXXXX of Organization B are federated with XXXXXX of which all are XXXXXX institutions in Ontario.

Organization B is required in its XXXX By-Laws to have 9 out of a total of 23 (9 out of 21, according to XXXX By-Laws) members of its board of trustees appointed by a group of employers described in clause (d) of the Schedule to the Social Contract Act, 1993. The other trustees are determined by elections from students, faculty members, and the general public upon nomination by the nominating committee.

Conclusion

Since only 9 out of 23 members is less than a majority, Organization B is not considered to be a person in the public sector as described in clause 1(g) of that schedule. Therefore, it is our opinion that Organization B is an eligible employer for EHT purposes and is eligible for the exemption for all open tax years from XXXX onward.

Updated: March 29, 2022
Published: March 29, 2022