The Ontario Employer Health Tax: Who Pays It, and the $1 Million Exemption

The Employer Health Tax is the Ontario levy that growing employers discover late, because nothing in the federal payroll process points at it. You open a CRA payroll account, you remit source deductions, you file T4s, and at no point does the CRA mention that Ontario runs a separate payroll tax with its own registration, its own instalments and its own annual return.

For most small Ottawa employers the tax is nil. That is the point of the exemption, and it is also why the obligation is so easy to miss until payroll crosses a line.

What EHT actually is

EHT is a tax on the total Ontario remuneration an employer pays. It is paid by the employer, not withheld from employees. Ontario sets out the full scheme in its guidance on the Employer Health Tax.

Do not confuse it with the Ontario Health Premium, which is an entirely different thing: a personal tax paid by Ontario residents through their own income tax return, collected through payroll withholding. Ontario’s health premium page is explicit that it applies to individuals with employment or pension income above $20,000 and is calculated on the individual’s own taxable income. One is the employer’s tax on payroll. The other is the employee’s tax on income. They are unrelated apart from the name.

The exemption, and the cliff above it

Eligible employers may claim an exemption against their total Ontario remuneration. Ontario’s tax exemption page confirms the exemption was raised from $490,000 to $1 million for 2020 and that the increase was made permanent in 2021. The next scheduled inflation adjustment was moved to 1 January 2029.

The cliff is the part that matters:

Employers with more than $5 million in annual Ontario payroll are not eligible to claim the exemption at all.

Not reduced. Not prorated. Gone. The only exception is registered charities, which may still claim it above $5 million. An employer at $4.9 million shelters the first $1 million of payroll. An employer at $5.1 million shelters none of it.

Associated employers get one exemption between them

This is where structuring goes wrong. Ontario’s rules on associated employers allow only one annual exemption for an associated group, allocated among the members. And when the combined Ontario remuneration of the associated group exceeds $5 million, no member can claim any exemption.

An owner who runs three Ontario companies does not get three exemptions. Splitting a payroll across two corporations to stay under a threshold does not work here any more than it works for the small business deduction. If you have a holding company, a sister operating company, or a spouse with a related corporation, run the association test before you rely on the exemption.

What counts as remuneration

Broader than salary. Ontario’s remuneration guidance covers the categories, and the practical effect is that most amounts you already report on a T4 form part of the base, including many taxable benefits. Employers who compute EHT off gross wages alone tend to understate it.

The tax applies to remuneration paid to employees who report for work at a permanent establishment of the employer in Ontario, or who are paid from one. That test lines up with the CRA’s province of employment concept, which is a live issue for employers in this region. An Ottawa employer whose staff report to a Gatineau location is in a different provincial regime altogether, which I have set out in living in Gatineau and working in Ottawa.

Rates, instalments and the annual return

Rates are graduated by total Ontario remuneration before the exemption is deducted, running from just under 1 percent at the bottom of the scale to 1.95 percent above $400,000. Because the bands are legislated and can be adjusted, take the current schedule from Ontario’s EHT page rather than from a payroll provider’s summary.

Two administrative points do the damage:

Instalments. Since the 2021 tax year, Ontario employers with payroll over $1.2 million must pay monthly instalments. Employers below that remit once a year. The trigger is payroll size, so an employer that grows through the threshold acquires a monthly obligation partway through a year, without anyone sending a notice on the day it happens.

The annual return. The EHT annual return and payment are due on or before 15 March of the following calendar year. That is a date with nothing else on it. It is not the T4 deadline in late February, and it is not a corporate year-end date. Ontario’s filing how-tos set out the mechanics. Put it in the same checklist as your payroll year end so it does not float loose.

When to register

Do you pay remuneration to employees who report to,
or are paid from, an Ontario permanent establishment?
│
├── No  → EHT does not apply. Check the province of
│         employment rules before concluding this.
│
└── Yes
    ├── Are you an eligible employer?
    │   (not government controlled, and either under
    │    $5M Ontario payroll or a registered charity)
    │   │
    │   ├── No  → Register. Tax applies from the first dollar.
    │   │
    │   └── Yes
    │       ├── Is your Ontario payroll, including that of
    │       │   any associated employers, above your
    │       │   allowable exemption?
    │       │       → Register and file.
    │       └── Below it? → No EHT payable, but confirm
    │                       annually. Payroll grows.
    │
    └── Payroll over $1.2M? → Monthly instalments as well.

What this means for an Ottawa employer

If you are a small practice or a young company with payroll under a million dollars, EHT will cost you nothing and you should still know the number, because the exemption is claimed rather than granted automatically.

If you are approaching $5 million in Ontario payroll, model the cliff before you cross it. Losing a $1 million exemption at the 1.95 percent rate is a real annual cost that arrives with no transition.

And if you own more than one corporation, do the association analysis first. It is the same analysis that governs your small business deduction limit, and the answer is frequently not the one owners expect.

Send me your Ontario payroll totals for the last two years, your corporate structure, and whether you have ever filed an EHT return. I will tell you whether you are registered correctly, whether the exemption you have been claiming survives association, and whether you should be on instalments. Get in touch.