The Employer Health Tax and Charities
Adam Aptowitzer, August 03, 2006
It should not astonish any reader that the imposition of the Employer Health Tax (the “EHT”) in Ontario is fraught with complexities. However, it may come as somewhat of a surprise that the Ontario Ministry of Finance has taken a liberal position in applying the EHT to registered charities – more surprising is that this position has seemingly no basis in law.
The EHT is a payroll tax, in that it is levied as a percentage of the total payroll of employees in Ontario. The percentages of EHT effective May 2006 are reproduced below.
The EHT Act provides an exemption to “eligible employers” as they are defined in the Act. The exemption applies to the first $400,000 of payroll such that an eligible employer only pays EHT of 1.95% on any payroll over $400,000. Charities per se do not fall under the definition of “eligible employer”, although most charities will. Generally, this may include charities which are not under government control (although they may receive government funding). We have reproduced the definition of eligible employer below:
“eligible employer” means, in respect of a particular time, an employer who is not, at that time,
(a) a person in the public sector, as described in clauses 1 (a) to (i) and section 2 of the Schedule to the Social Contract Act, 1993, and not subject to tax under Part I of the Income Tax Act (Canada),
(b) the Crown in right of Canada or of another province or the government of a territory,
(c) any of the following persons who are not subject to tax under Part I of the Income Tax Act (Canada) for the year:
1. an agency of the Crown,
2. an authority, board, commission, corporation, office or organization of persons a majority of whose directors, members or officers are appointed or chosen by or under the authority of the Governor General in Council or a member of the Privy Council or by a Lieutenant Governor in Council or a member of the Executive Council of a province,
(d) a person that is exempt throughout the year from tax under Part I of the Income Tax Act (Canada) under any of paragraphs 149 (1) (a) to (d.6), (h.1), (o) to (o.2), (o.4) to (s.2) and (u) to (z) of that Act, or
(e) a person prescribed not to be an eligible employer for the purposes of section 2 or 2.1;
While neither the Act nor the Regulations refer specifically to any additional exemptions for registered charities, the Ministry of Finance allows registered charities that are eligible employers to treat each of its locations as a separate employer and apply the exemption in respect of the payroll paid at each location. In order to qualify for the multiple locations exemption the Ministry requires evidence that each physical branch is separate from the main body of the charity. As examples of evidence the Ministry cites separate charitable registration numbers for each physical branch. This evidence required by the Ministry seems to indicate some confusion on the practicality of this exemption. If a location is operated by a separately registered charity they are likely to have a separate payroll and thus qualify for the exemption on their own. On the other hand, the Ministry will accept evidence that the charity operates in more than one location and that the location “belongs” to the charity. While somewhat vague, this evidence seems to indicate that the Ministry is willing to apply the exemption in cases where registered charities legitimately carry out operations in multiple locations without registering multiple organizations, which one would think is the reason for the policy in the first place.
In an equally impressive show of generosity the Ministry is allowing charities which qualify for the multiple locations exemption to apply for a refund where they did not take advantage of the exemption in previous years. There does not seem to be a time limit on the period for which the charity can apply for a refund. So, for eligible charities this might represent a significant reserve of untapped wealth.
This issue was brought to the author’s attention by the Tax Recovery Group of Barrie, Ontario. This group specializes in locating overpaid taxes on behalf of, among others, charities, not-for-profits and municipalities. For direct help in applying for a refund of EHT under the guidelines stated above, please contact John.Robinson@taxrecoverygroup.com.