The Ontario Ministry of Finance has announced that it is reviewing a new regulation under the Employer Health Tax Act (the “Act’) that it says will clarify how the employer health tax (“EHT”) applies to Canadian registered charities with employees in Ontario. EHT is essentially a payroll tax that certain employers, including many charities, are required to pay every year on the income they pay to their employees in the year. It appears, on a reading of the announcement, that Finance is contemplating some significant changes to the EHT regime.
The Ministry has invited charities to review a proposal on this topic and provide comments by October 19, 2016.
Registered charities are entitled to claim an EHT exemption on the first $450,000 of their annual Ontario payroll, regardless of the total amount of their payroll. Private sector employers are only exempt on the first $450,000 of their annual Ontario payroll if the total amount of their payroll is under $5 million.
Each different location of a charity is treated as a separate employer for EHT exemption purposes and may separately claim the full exemption. The question of whether a charity has more than one location that is entitled to claim a full exemption depends on a number of factors including the following:
- Whether there is supporting evidence that a location belongs to the charity (such as where the charity is party to a lease or another agreement, is listed on the property tax bill, or other) and the location is publicly advertised as being a location of the charity;
- The location has its own charitable registration number; and
- The location files its own T3010 Registered Charity Information Return.
Where a charity is “associated” with another charity or a private sector employer, the charity’s eligibility for the exemption is not affected. In other words, the charity may claim the full exemption. Moreover, the private sector employer is not required to include the charity’s payroll in the calculation of its total payroll for the year and may separately claim the full exemption, provided that it meets the other eligibility criteria. The question of whether a charity and another entity are “associated” for purposes of the EHT regime is determined with regard to the rules in the Income Tax Act (Canada) and can involve a somewhat complicated analysis, depending on the particular situation.
Associated employers must enter into an allocation agreement and complete and file each year an Associated Employers Allocation form, which indicates to the Ministry how the associated employers agree to share the EHT exemption. As indicated above, in the case of a charity that is associated with a private sector employer, the charity would indicate on the form that it is claiming the full exemption that it is entitled to claim.
It appears, based on a reading of Finance’s announcement, that despite the language of the rules in the Act, Finance had a practice of permitting charities entitled to multiple exemptions to claim more than one exemption in respect of a single location. It is unclear how long this administrative practice has been in place.
When it published its announcement on July 18, 2016, Finance indicated that it is considering a new regulation to the Act that would:
- Provide one exemption for each qualifying location of a registered charity;
- Clarify that registered charities are exempt from the association rules for claiming the exemption; and
- Waive the requirement for registered charities to enter into and file an Associated Employers Exemption Allocation Agreement.
Finance also stated that:
The regulation would end the preferential administrative practices that allow multiple exemptions at a single qualifying location.
The regulation would require registered charities to file an annual return for each of its qualifying locations. Registered charities would also be required to combine the payrolls of all of their qualifying locations to determine the applicable EHT rate.
Some registered charities that currently make annual remittances may be required to change to monthly instalments. However, this would not affect the amount of tax a charity would pay, and would apply only if both the combined payroll of all of its qualifying locations exceeds $600,000 and the charity has EHT payable.
It appears, based on these initial comments by Finance, that the changes being contemplated are significant. In particular, the regulation will specifically provide that each location of a charity is only entitled to claim a single EHT exemption in respect of its own payroll. This may result in some charities having greater overall EHT liability.
The measure that proposes to waive the requirement that registered charities enter into and file an Associated Employers Exemption Allocation Agreement will likely help to reduce the administrative work of some charities. This proposal appears to mean that charities will also not be required to file the Ministry’s prescribed allocation form each year, but that is not entirely clear from the language of the notice since the notice refers to the filing of the allocation agreement, not the form itself.
Since the new rules may result in some charities having a greater EHT liability as a result of not being able to claim multiple deductions in respect of one location, those charities may be required to make more frequent EHT payments. Generally, charities with a total annual Ontario payroll of $600,000 or less can pay once per year.
Finance has indicated that it intends for the new regulation to be effective as of January 1, 2017. For more information on the proposal or to submit comments, click here.