Ontario Employer Health Tax and Amalgamation Strategy

An eligible employer is allowed an exemption from the Ontario employer health tax (EHT) on the first $450,000 of its total Ontario remuneration per year (unless its annual Ontario payroll is over $5 million). However, eligible employers who are members of an associated group (as determined by ITA section 256) at any time in the year are required to share the exemption amount by entering into an agreement to allocate the tax exemption for the year (EHT Act section 2.1(4)).

Proper structuring can reduce the EHT payable on a business purchase involving a plan to amalgamate companies: instead of a share purchase followed by an amalgamation, amalgamate first and then have one group of shareholders buy out the other shareholders. The benefit of this strategy is greater if amalgamation occurs late in the fiscal year, although it still may not be significant enough to warrant changing the structure.

For example, assume that A Co plans to amalgamate with B Co 300 days into the fiscal year to form C Co. The total Ontario payroll for each company in the period before the amalgamation does not exceed the prorated $5 million ceiling. Normally, each of A Co and B Co would get an exemption from EHT for the first $369,863 of payroll ($450,000 × 300/365); the amalgamated C Co would also be entitled to a separate prorated exemption. But if one company purchases the other before the amalgamation, the two predecessor companies become associated immediately at that time, and the prorated exemption amount for the period before the amalgamation must be shared between them. The savings from using the amalgamate-first strategy in this example would be approximately $7,200 (the maximum rate of 1.95% × $369,863).

Although the EHT legislation is clear on this point, it appears from conversations with various agents at the ministry that some agents may instead allow each predecessor corporation to claim a prorated exemption. But this may be more unlikely in 2018, given the intent of recent changes to the EHT Act to reduce the multiplication of the exemption. Paralleling recent ITA measures to prevent taxpayers from multiplying the small business deduction, effective in 2018 the EHT exemption is eliminated for any employer that is a "designated member" of a partnership as defined in ITA section 125 (EHT Act section 2.1(4.1)).

The set of employers eligible for the EHT exemption is to be restricted: "Ontario proposes to follow the eligibility criteria for the SBD for the EHT exemption" effective January 1, 2019 (Ontario budget 2018, p. 290).

Jody Wong
MNP LLP, Toronto
[email protected]

Canadian Tax Focus
Volume 8, Number 2, May 2018
©2018, Canadian Tax Foundation