EHT is payable by employers on remuneration paid to:
- employees who report for work at a permanent establishment in Ontario
- employees and former employees who do not report for work at a permanent establishment of the employer but who are paid from or through a permanent establishment of the employer in Ontario.
Remuneration includes all payments, benefits or allowances which are required under sections 5, 6 or 7 of the Income Tax Act (Canada), to be included in the income of the employee from an office or employment, or would be required if the employee were a resident of Canada.
Any changes made by the federal government to sections 5, 6, or 7 of the Income Tax Act would affect the taxability of these items.
A closer look at remuneration
We may use the word payroll in this book instead of the word remuneration.
In general, remuneration means employment income (box 14 of the T4 slip, plus other boxes on the T4 and T4A) that is taxable under sections 5, 6, and 7 of the federal Income Tax Act.
In addition to salary and wages, remuneration may also include a number of other items, such as taxable allowances and benefits, payments for casual labour, and amounts paid by an employer to top up benefits.
Taxable total Ontario remuneration means the remuneration after the employer’s available exemption is deducted.
Notes on remuneration
Employers must include amounts paid to former employees in their calculation of remuneration for the year. For example, taxable benefits provided to retired employees should be included even though they are reported on a T4A.
Please note that for registered charities, the employer does not have to pay EHT on the remuneration of employees who don’t report for work at a permanent establishment of the employer if they work outside of Canada for at least 183 continuous days.
Although remuneration includes all things which are included in income under sections 5, 6, and 7 of the Income Tax Act, we do not list every item in this book. In addition to the items mentioned in the previous section, the following items are included in remuneration:
Bonuses are subject to EHT in the year they are paid, or deemed to be paid, to employees.
Advances paid on future earnings in respect of salaries, wages or commissions are subject to EHT at the time the advances are paid to employees.
A payment by an employer to an employee is usually considered an advance paid on future earnings when there are no provisions for interest payable on the amount, and the employer deducts all or part of the advance from the employee’s earnings.
Vacation pay is subject to EHT in the year it is paid out to the employee.
Commissions paid by an employer to its employees are subject to EHT. Commissions paid to independent contractors or independent agents under a contract for service, are not subject to EHT.
An amount paid as a signing bonus is considered remuneration subject to EHT. In addition, any amount paid by an employer to an employee under an agreement that prohibits the individual from engaging in certain activities, either before or after employment, is considered remuneration for EHT purposes.
Payments to clergy
Even though they may have taken vows of perpetual poverty, members of religious orders are considered to receive remuneration from an office or employment. These payments or allowances are included in income under sections 5 and 6 of the federal Income Tax Act (ITA) and are subject to EHT. The fact that these individuals may be able to claim a deduction under subsection 110(2) of the federal ITA is irrelevant for EHT purposes. The full amount of the remuneration is included in total Ontario remuneration and is subject to EHT.
Amounts paid to employees as an allowance for personal or living expenses or for most other purposes, are taxable benefits and are subject to EHT. See the exceptions section for allowances which are not taxable benefits.
A flat rate car allowance (whether paid monthly, quarterly, annually, or on any other basis) is a taxable benefit included as remuneration subject to EHT. A reimbursement based on a reasonable amount per kilometre is not considered a taxable benefit and is not subject to EHT.
Clergy’s housing allowances
Clergy who are provided with free accommodation, or who are paid an allowance for accommodation, are required to report the value of the benefit, or the amount of the allowance, as income for income tax purposes and these amounts are subject to EHT. The fact that these individuals may be able to claim a deduction under section 8 of the federal Income Tax Act (ITA) is irrelevant for EHT purposes.
Tips and gratuities
Gratuities paid to an employee through the employer (controlled gratuities) are subject to EHT. However, gratuities paid to an individual directly by a customer (direct gratuities) are not subject to EHT since there is no employer-employee relationship between the individual and the customer.
Gifts and awards
A gift to an employee in cash or near cash, such as gift certificates, is a taxable benefit and is subject to EHT. Incentive awards, performance-based rewards, and performance bonuses are also subject to EHT.
However, under the administrative policy issued by the Canada Revenue Agency (CRA), employers are able to give employees, exempt from personal income tax:
- an unlimited number of tax-free, non-cash gifts per year for religious holidays, birthday, wedding, or birth of a child, to a maximum value of $500 including HST for the total value of all gifts
- a number of tax-free, non-cash awards per year for employment related accomplishments which contribute to the workplace, such as outstanding service, to a maximum of $500 including HST for the total value of all awards.
These non-taxable gifts and awards are also not subject to EHT on the first $500 of value. Amounts in excess of $500 are taxable benefits for EHT purposes.
Please note that as this is a federal administrative policy, it is subject to change. Verify from the CRA’s website whether your gifts and awards are taxable.
A loan is a payment made to an employee that has terms and conditions for repayment, and is not paid in lieu of services performed or services to be performed. The principal amount of the loan to employees is not subject to EHT. However, the difference between the amount of interest that would be payable at the prescribed interest rates under the federal Income Tax Act (ITA) and the amount of interest that an employee actually paid on a loan in the year, is a taxable benefit that is subject to EHT.
Directors’ fees or other fees received in the year in respect of holding an office or employment (e.g., amounts received for filling the position of corporate director) are employment income and are subject to EHT.
Use of an employer’s automobile
The personal use of an employer’s automobile is a taxable benefit to the employee. The calculated standby charge and operating benefit (if applicable) are subject to EHT.
An employer’s contribution to an employee trust plan (i.e. Employee Assistance Plan) is included in the employee’s income when it is allocated by the trustee each year.
Employee profit sharing plans (EPSPs)
An EPSP is an arrangement under which an employer pays a portion of its business profits to a trustee to be held and invested for the benefit of its employees who are members of the plan. An employer’s contribution to an EPSP is considered remuneration subject to EHT at the time the contribution is made to the plan.
Salary deferral arrangements
Where an employee postpones receiving part, or all, of his or her remuneration (deferred amount) until a later year under a salary deferral arrangement between the employer and employee, the deferred amount is subject to EHT in the year it is earned rather than in the year when it is actually paid to the employee.
However, under a prescribed plan (as defined in section 6801 of the federal Income Tax Regulations), the deferred amount is not subject to EHT until the year in which it is paid to the employee.
Registered retirement savings plans
Employer contributions to or matching amounts for your group RRSP contributions are taxable and are subject to EHT.
Insurance plans & policies
Group life insurance policies
Employer-paid premiums on group life insurance, group term life insurance, or dependent life insurance (for current employees and for former employees such as retirees), are taxable benefits for income tax purposes and are subject to EHT.
Group sickness or accident insurance plan
Employer-paid premiums are taxable benefits and are subject to EHT if the benefit would be paid out as a lump sum.
Employer-paid premiums are not taxable benefits and are not subject to EHT if the benefit would be paid out as periodic payments.
Employment Insurance benefit/plan
Benefits received as periodic payments (as salary continuance) by employees under a sickness or accident insurance plan, disability insurance plan, income maintenance insurance plan, or plan provided by an employee life and health trust plan, are taxable benefits for income tax purposes and are subject to EHT.
Non-group insurance plans
Employer contributions to an insurance plan for an individual employee (often an executive) are taxable benefits, even if it is for a sickness, accident insurance or disability insurance plan.
Stock option benefits
Stock option benefits deemed to be received in the year by employees and former employees from shares of the employer or a connected corporation of the employer (i.e., a corporation with which the employer does not deal at arm’s length) are included in employment income and are subject to EHT. The employer must include these amounts in their total Ontario remuneration.
Employee stock options are granted under an agreement to issue securities (shares of capital stock of a corporation, or units of a mutual fund trust), where a corporation provides its employees (or employees of a non-arm's length corporation) with a right to acquire securities of either of those corporations.
If a stock option is issued to an employee by a non-arm’s length corporation (within the meaning of section 251 of the federal ITA), the value of any benefit received is included in the remuneration of the employer for EHT purposes.
Employee moved to Ontario PE from non-Ontario PE
An employer has to pay EHT on the stock option benefits created from an employee exercising stock options when their remuneration is subject to EHT. This includes stock options granted while the employee was reporting for work at a non-Ontario PE of the employer.
Employee moved to non-Ontario PE
An employer does not have to pay EHT on the stock option benefits arising when an employee exercises stock options while reporting for work at a PE of the employer outside Ontario.
An employer is required to pay EHT on the value of stock option benefits of a former employee, if their remuneration was subject to EHT on the date the person ceased to be an employee.
When Stock Option Benefits Become Taxable
Canadian-controlled private corporations (CCPCs)
If the employer is a CCPC (within the meaning of subsection 248(1) of the federal ITA), the employee is considered to have received a taxable benefit (under section 7 of the federal ITA) at the time the employee disposes of the shares.
Where employee stock options are issued by a CCPC, but are exercised by the employee after the company has ceased to be a CCPC, the value of the benefit will be included in remuneration for EHT purposes at the time the employee disposes of the securities.
Non-Canadian controlled private corporations (Non-CCPCs)
Any taxable benefit resulting from an employee exercising stock options on securities that are not of a CCPC, including publicly listed securities or securities from a foreign-controlled corporation, must be included in remuneration at the time the options are exercised.
Federal deferral of taxation, federal limit on stock option deduction does not apply to EHT
Federal restrictions, deferrals or deductions on stock options are for federal income tax purposes only, and are noted in federal ITA s.110.
The federal deferral of taxation on stock option benefits is not applicable for EHT purposes. The $200,000 limit on stock options qualifying for the federal 50% stock option deduction is not applicable for EHT purposes.
An employee who does not get the statutorily required written notice must get termination pay instead. An amount paid at the time of termination in lieu of notice is remuneration that is subject to EHT.
Additionally, other items paid out at the end of employment, such as bonuses, commission payments, accumulated overtime, and unused vacation credits are ordinary income and do not qualify as a retiring allowance. Therefore, these items are taxable for EHT purposes.
Tuition, scholarships, and bursaries
Employee tuition, scholarships, and bursaries
A tuition fee that is paid on behalf of an employee, or reimbursed to an employee, is a taxable benefit and is subject to EHT unless it is determined that the course or training was primarily for the benefit of the employer (whether or not it leads to a degree, diploma or certificate).
If a scholarship, bursary, or any other education expense, is paid by an employer to an employee during employment, or immediately after a period of employment, on the condition that the employee will return to work for the employer after the courses are completed, the amount is a taxable benefit and is subject to EHT.
Scholarships, bursaries and free tuition awarded to family members of employees
Employer and employee not dealing at arm’s length:
The value of the benefit is generally included in the employee’s income under paragraph 6(1)(a) of the Income Tax Act (ITA) and is subject to EHT.
Employer and employee dealing at arm’s length:
If it is reasonable to conclude that the scholarship, bursary or free tuition is NOT a substitute for salary, wages or other remuneration of the employee, the benefit is taxable in the hands of the student who is in attendance at an elementary, secondary or post-secondary institution (rather than the employee), and is not subject to EHT.
However, if it is reasonable to conclude that the scholarship, bursary or free tuition IS a substitute for salary, wages or other remuneration of the employee, the benefit is taxable in the hands of the employee and is subject to EHT.
Some employers top up employment insurance benefits (e.g., for parental leave) or WSIB benefits. These top-up payments are employment income under the federal Income Tax Act (ITA) and are subject to EHT.
However, a top-up payment made by an independent third-party trustee, under the terms of a supplementary unemployment benefit plan, is not considered remuneration for EHT purposes.
Management fees and payments
If an employee is paid a management fee, it is included in the employee’s income. If a management fee is paid to a company or to a self-employed individual, it is generally not considered remuneration and is not subject to EHT.
In the case of a one-person operation where the business is incorporated and that person is the sole shareholder and works for the corporation, that person is considered to be an employee of the corporation (not self-employed) and the remuneration paid by the corporation (excluding dividends) is subject to EHT.
Payments to corporations, including management fees
If you contract the services of an individual who operates through a corporation which is a personal services business, you may be required to pay EHT on payments you make to the individual’s corporation if:
- it is reasonable to consider that the payments are made in consideration for services rendered, and
- if not for the existence of the corporation, the individual could reasonably be regarded as your employee.
If you look at the employer-employee relationship tests and you determine the individual operating through a personal services business looks like an employee, or is an Officer, and you are paying them for providing those services, even if that payment is labelled as a management fee, then the payments will be subject to EHT.
If upon termination an individual receives periodic payments and remains entitled to benefits available only to employees, for example, long-term disability, or the individual continues to accrue pensionable service or continuation in the group RRSP plan, the payments are considered a salary continuance. Salary continuance is remuneration under the federal Income Tax Act (ITA) and is subject to EHT.
There may be situations where periodic payments following an individual’s loss of office or employment could represent instalments of a retiring allowance. However, periodic payments will not be considered a retiring allowance if the payments are treated as income from employment for the purpose of calculating employment insurance premiums and benefits, Canada Pension Plan pension accruals, or eligible years of service under a registered pension plan. These payments are considered a salary continuance and are subject to EHT.
A disability benefit paid directly by an employer to an employee is included in the income of the employee and is subject to EHT. Similarly, when a disability benefit is paid by a third-party, acting as an agent of the employer under the terms of an Administrative Services Only (ASO) arrangement, the benefit paid is also subject to EHT.
However, disability benefits are not subject to EHT if:
- paid by an insurance company, under the terms of an insurance contract between the employer and the insurer
- paid by an independent third-party trustee, where there is no employer-employee relationship between the trustee and the recipient.
Board and lodging
The value of free or subsidized board and lodging provided to an employee is a taxable benefit subject to EHT, unless provided at a special work site or remote location.
To determine what is subject to EHT, an employer should determine if the amount paid to the employee is required to be included in the employee’s income under sections 5, 6, or 7 of the federal Income Tax Act.
Remuneration does not include the following:
- a pension, annuity or superannuation paid by an employer to a retired employee
- remuneration paid by Indians (as defined in subsection 2(1) of the Indian Act) who are carrying on business on a reserve
- remuneration paid by a corporation located on a reserve to employees working on the reserve who are Indians (as defined in subsection 2(1) of the Indian Act)
- remuneration paid to employees by an embassy or a consulate.
Employer-paid premiums or contributions
The following types of employer-paid premiums or contributions are not included as remuneration in an employee’s income under the federal Income Tax Act, and are not subject to EHT when they are made to the following types of prescribed plans:
- registered pension plans
- private health services plans (i.e., medical and dental)
- supplementary unemployment benefit plans
- deferred profit sharing plans
- employee life and health trust
- group sickness or accident insurance plan (periodic payment benefit plans)
- retirement compensation arrangements (RCAs), defined under subsection 248(1) of the federal Income Tax Act, which allow 100% tax-deductible corporate dollars to be deposited into an RCA, on behalf of the private business owner and/or key employee.
The following types of benefits derived from the employer’s contribution to these plans are not included as remuneration in an employee’s income under the Income Tax Act section 6(1)(a) exceptions, and these contributions are therefore not subject to EHT :
- deferred profit sharing plan
- employee life and health trust
- group sickness or accident insurance plan
- group term life insurance policy
- pooled registered pension plan
- private health services plans
- registered pension plans
- supplementary unemployment benefit plans
- retirement compensation arrangements
- employee benefit plan
- employee trust
- counselling service for mental or physical health of the taxpayer or family, re-employment or retirement of the taxpayer.
However, benefits which are received or deemed to be received by the employee may be taxable.
The following allowances are not included in an employee’s income, as stated in the Income Tax Act (ITA) s.6(1)(b) as exceptions, and are not subject to EHT :
- Travel, personal or living expense allowances fixed by parliament, or received as a member of the Canadian Forces
- Reasonable travel allowances
- Allowances for board and lodging, up to $300 per month, when:
- under the age of 21 and a member of a sports team, or
- for participation, or
- the employer is a charity, or
- the allowance is reasonably attributed to the cost of the taxpayer living away from home
- Reasonable allowance for a minister or clergy for transportation to discharge duties
- Reasonable allowance for travelling salesperson
- Reasonable car allowance for travelling for employment duties (based on km and actual expenses)
- Reasonable allowance for employee’s children for boarding school where suitable schooling in English or French is not available where the employee is required to live
Severance pay/retiring allowances
Severance pay, or ‘severance,’ is an amount paid based on length of service that is payable to an employee upon termination of employment. Severance pay is considered retiring allowance under the federal Income Tax Act section 56 and is not subject to EHT.
A retiring allowance is paid at the discretion of the employer.
Retirement or loss of employment does not include the following:
- transfer from one office or position to another with the same employer
- termination with an employer then re-employment with an affiliate
- termination of employment due to death.
Severance pay is not the same as termination pay, which is subject to EHT.
What’s included in severance pay
The meaning of retiring allowance includes any amounts paid to an employee who is leaving as compensation for loss of office or employment, or relating to a court award or settlement for wrongful dismissal, or in recognition of long service.
Therefore, retiring allowance is not considered income from an office or employment under the ITA, and is not subject to EHT.
A payment relating to unused sick leave credits qualifies as a retiring allowance and is not subject to EHT.
What’s not included in severance pay
Employers often refer to the total amount paid to an employee upon termination as severance pay; however, this amount could include taxable items. For example, if the total payment being made to a terminated employee includes pay in lieu of notice, which is termination pay, the pay in lieu of notice is considered employment income, and is subject to EHT.