Employer Health Tax – Overview
Effective January 1, 2019, the Employer Health Tax (EHT) became effective. Under the EHT, employers will pay a tax on their total payroll, subject to meeting certain thresholds. On January 1, 2018, the B.C. government reduced the Medical Service Plan (MSP) premiums that individuals were required to pay in by 50%, with the intent of fully eliminating MSP by January 1, 2020. As a result, the EHT was implemented to offset this loss in premiums. The EHT is intended to replace the current Medical Service Plan (MSP) in place, starting on January 1, 2020.
When Does the EHT Apply?
Employers with total annual payroll in excess of $500,000 are subject to EHT requirements.
- Annual payroll of greater than $500,000 and up to $1,500,000 are subject to 2.925% tax, calculated as follows:
(Annual payroll – $500,000 * 2.925%)
- Annual payroll that $1,500.000.01 or higher is subject to a 1.95% EHT. This tax applies to the entire annual payroll.
Additional considerations for B.C. employers: EHT only applies to wages that are paid when employees report to work at a location within B.C or are paid through a permanent establishment in B.C., even if they work offsite. Establishments are considered permanent if it is the employer’s primary place of business, the company carries inventory at the location, or a place where substantial amount of machinery or equipment is used, to name a few examples. If you have locations outside of B.C. that are considered permanent establishments that employees report to, payroll that is paid to those employees is not subject to EHT.
Associated employers that meet the threshold to pay EHT are only eligible for one $500,000 exemption across the group, if the total payroll exceeds $500,000, but is no more than $1,500,000. No exemption can be taken if the total payroll is greater than $1,500,000. Employers are considered “associated” if one corporation controls another corporation or if two or more corporate entities are controlled by one person or a group of people. Even if two or more entities are controlled by different people, they may be considered associated employers if those controlling the organizations are related to each other. If two corporations that have no common ownership are related to a third organization, all three can be considered associated employers, even though two of the three entities have no direct relationship with each other. .
EHT is only required to be paid based on compensation paid to or on behalf of employees. Payments made to independent contractors are not subject to EHT.
If you are an owner of a small business or partnership, income that flows through to you is not subject to EHT as it is considered business income.
Income Subject to EHT
Income subject to EHT not only includes salaries and wages, but it also includes benefits as well. Below is a breakdown of income that EHT will be due on, provided that the company exceeds the annual payroll threshold;
- Salary and wages, including advances
- Payments for vacation
- Bonuses and commissions
- Gratuities or tips paid through an employer
- Taxable allowances and benefits
- Fees paid to directors of corporations
- Amounts paid by an employer to top up benefits (e.g. top up for maternity or paternity leave)
- Stock option benefits
- Employer-paid contributions to an employee’s Registered Retirement Savings Plan
- Employer-paid group life insurance premiums
Not all income is subject to EHT. The following employer-made contributions are not required to be included in the determination of EHT;
- Registered pension plan
- Private health services plan
- Supplementary unemployment benefit plan
- Deferred profit sharing plan
- Retirement compensation arrangement
EHT is only applicable in the year that the remuneration is paid to or on behalf of an employee.
EHT and Non-Profit Employers
Charities and non-profit organizations are subject to EHT. The rules that apply to non-profit and charity employers are as noted below;
- The threshold for EHT is based on a per location basis in B.C., instead of based on the total B.C. payroll for the entity
- Charities and non-profits are not required to pay EHT is their total payroll is $1,500,000 or less for that location
- Payroll that ranges between $1,500,000.01 and $4,500,000, per location, will be subject to a 2.925% EHT, determined as follows; (Payroll for the location – $1,500,000) x 2.925%
- Payroll that exceeds $4,500,000, per location, will be subject to a 1.95% of EHT for the entire location
- Even if they are considered to be associated with another entity, non-profit or other charitable organizations are not required to share the exemption amount
Employers who are subject to EHT will be required to file an annual employer EHT return, which will be filed and paid online.
Employers with payroll exceeding $600,000 that is subject to EHT tax will be required to make quarterly installments. Charities and non-profits with payroll that exceeds $1,600,000, per location, that is subject to EHT will be required to make quarterly installments.
Employers who are subject to EHT must register by December 31, 2019. If a company is required to make quarterly installments, it must register by May 15, 2019 and make its first installment by June 15, 2019. The first EHT return is required to be filed by March 31, 2020. Failure to file your return timely and pay taxes at the required time will subject a company to penalties and interest.
Employers that are not subject to EHT are not required to register or file an annual employer EHT return.
Medical Service Plan (MSP) premiums were commonly paid by employers on behalf of their employees. Effective January 1, 2020, residents and employers in B.C. will no longer be required to pay these premiums. It should be noted that during this transition period, an employer may be required to pay in both MSP and EHT.
A Final Word
With the change in law, companies of any size should consider both the financial and compliance impact of EHT.