British Columbia Budget 2018 included the announcement of a new payroll tax called the Employer Health Tax (the “EHT”). Preliminary details were released over the summer, with additional details being released in recent months. The EHT came into effect on January 1, 2019; employers should be aware that the EHT may result in a significant new tax liability for 2019 and future years.
The EHT is intended to replace the existing Medical Services Plan (“MSP”) premiums, which will be phased out on January 1, 2020. Both the EHT (paid by employers) and the MSP (paid by individuals or, in some cases, their employers) will be in effect during 2019.
WHO WILL THE EHT APPLY TO AND WHAT ARE THE FILING REQUIREMENTS?
The EHT will generally apply to employers with an annual “BC payroll” in excess of $500,000 determined on a calendar year basis. The EHT will apply to BC Payroll, which is defined to include:
- payments to employees who report to work at a permanent establishment* of the employer in British Columbia, and
- payments to employees who do not report to work at a permanent establishment of the employer, but are paid from or through a permanent establishment in British Columbia.
Employers who are liable for the EHT are required to file an annual online EHT return; the first return, for 2019, will be due on March 31, 2020. Employers with BC payroll in excess of $600,000 are required to make quarterly instalment payments. Further details on important dates and how to register are discussed below.
HOW WILL MY EHT LIABILITY BE CALCULATED?
Generally, employers with BC payroll between $500,000 and $1,500,000 (referred to as the “notch rate” amount) will be required to pay the EHT at a rate of 2.925% on BC payroll in excess of $500,000. For example, an employer with an annual BC payroll of $1,000,000 in 2019 will calculate its EHT liability as follows:
2.925% x ($1,000,000 – $500,000) = $ 14,625
For employers with BC payroll in excess of $1,500,000, EHT will apply to the entire BC payroll at a rate of 1.95%. For example, an employer with an annual BC payroll of $2,000,000 will calculate its EHT liability as follows:
1.95% x $2,000,000 = $ 39,000
Employers with an annual BC payroll below $500,000 will not be liable for the EHT and will not need to file an annual EHT return. BC payroll of associated employers is aggregated for the threshold exemptions (see details below).
For part-year employers (employers that either begin or cease to have a permanent establishment in B.C. in a calendar year), the exemption amount and notch rate amount are prorated for the number of days in the calendar year the employer has a permanent establishment in B.C.
Special rules and limits will apply to the calculation of EHT for charities and not-for-profit employers.
REGISTERED CHARITIES AND NOT-FOR-PROFIT EMPLOYERS
For registered charities and not-for-profit employers with BC payroll, the basic exemption limit is $1,500,000, and the notch rate amount is $4,500,000. For registered charities and not-for-profit employers with multiple locations, this limit is applied on a location-by-location basis such that EHT will not apply to locations with BC payroll below $1,500,000.
A registered charity or not-for-profit employer with an annual BC payroll of $2,000,000 in 2019 will calculate its EHT liability as follows:
2.925% x ($2,000,000 – $1,500,000) = $ 14,625
For registered charities and not-for-profit employers with BC payroll in excess of $4,500,000, EHT will apply to the entire BC payroll at a rate of 1.95%. For example, a registered charity with BC payroll of $5,000,000 will calculate its EHT liability as follows:
1.95% x $5,000,000 = $ 97,500
Charities and not-for-profit employers with BC payroll in excess of $1,600,000 at a single location will be required to make quarterly instalment payments.
For part-year charitable and not-for-profit employers, the exemption amount and notch rate amount are prorated for the number of days in the calendar year the employer has a permanent establishment in B.C.
ASSOCIATED EMPLOYERS
The $500,000 exemption amount must be shared by associated employers. The associated test for the EHT is based on the meaning provided in the Income Tax Act (Canada). This association test is expanded to treat individuals, partnerships and trusts as if they are corporations. For example, a corporation with a partnership interest may be associated with the partnership, or one or more of the other partner corporations, for the purposes of determining the EHT exemption amount and notch rate. Also, there is no provision for an employer to elect out of the association rules for the purposes of the EHT, as is provided in the association test in the Income Tax Act. Two employers who otherwise would not be associated may be associated through common association with a third entity.
Associated employers (other than registered charities and non-profit employers) will need to reach an agreement on how the exemption amount will be allocated. Registered charities and non-profit employers do not need to share the exemption amount if they are associated with other employers.
If you are unsure whether your corporation, proprietorship, partnership or trust is associated with another employer for EHT purposes, consider speaking to a D&H Group advisor.
REGISTRATION INFORMATION AND IMPORTANT DATES
If you are required to file an EHT return, you must register for the EHT through your eTaxBC account. Registration will require you to provide a Federal Business Number (BN), mailing address and business location address, incorporation number and date (if applicable), and permanent establishment date. The process is expected to take approximately 10-20 minutes, and you will receive an EHT number. Employers with an instalment requirement must register by May 15, 2019 and all others required to register must do so by December 31, 2019. The first quarterly EHT instalment will be due June 15, 2019 with subsequent instalments due on September 15, 2019 and December 15, 2019. The final payment will be due along with the EHT return on March 31, 2020. Registration, payments, and filing should be completed on time to avoid potential interest and penalties.
Required instalments amounts will be based on 2018 payroll as if the tax had applied in 2018. The Government of British Columbia has provided an online BC EHT calculator here. Keep in mind, this online calculator does not adjust for any sharing of the $ 500,000 exemption amongst associated employers (discussed above).
CONCLUSION
Employers with BC payroll should be aware that the introduction of the EHT may result in a significant new tax liability for 2019 and future years. EHT may impact various important business decisions such as:
- timing and form of compensation to employees and shareholders
- employee vs. contractor relationships
- incorporation of an existing sole proprietorship or partnership business
More information from the Government of British Columbia on the EHT can be found here.
The determination of BC payroll can be complex. We are available to provide advice on all matters pertaining to the EHT, including the calculation of your business’s BC payroll amount and EHT remittance and tax return filing requirements.
*A permanent establishment includes:
- Any fixed place of business, such as office, agency, branch, factory, farm, gas or oil well, mine, timberland, warehouse or workshop
- The principal place where the employer conducts business and each place where the employer carries on a substantial portion of the business, if the employer has no fixed place of business
- A place where business is carried on through an employee or agent who has general authority to contract for the employer
- A place where an employer has a stock of merchandise and an employee or agent fills orders from the employer’s merchandise
- A place where, and at the time when, the employer uses substantial machinery or equipment
- A place where an employer produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves, processes or constructs anything (in whole or in part), if the employer does not otherwise carry on business in Canada in a year, whether or not the item is exported prior to sale
- Land or premises owned or leased by the employer
- The head office (or the registered office), as stated in a corporation’s charter or by-laws
- A place where an insurance corporation is registered or licensed to do business
Please contact your advisor at D&H Group LLP if you have any questions about the new EHT.
