Employer Health Tax for Associated Employers

If you’re associated with one or more employers on December 31, you're considered to be an associated employer for the purposes of the employer health tax. If you aren’t associated with another employer on December 31, you aren’t considered associated for that calendar year.

Associated employers are required to share any exemption amount they may qualify for. 

Associated Employers

Associated employers are a group of employers connected with each other by ownership or by a combination of ownership and relationships between individuals. Learn more about relationships.

The association rules determine whether one or more employers are controlled, directly or indirectly, by the same person, group of persons, related individuals or a related group. Learn more about control.

The employer health tax applies section 256 of the Income Tax Act (Canada) with modifications to determine whether or not employers are associated. In particular, the association rules are extended to include individuals, partnerships and trusts.

The following circumstances describe different employers that are associated with one another:

  • One corporation controls the other corporation. See an example
  • Two corporations are controlled by the same person, or group of persons. See an example
  • Each corporation is controlled by a different person and the persons are related. One of them owns at least 25% of any class of shares of each corporation. See an example
  • One corporation is controlled by one person, and that person is related to all members of the group that controls the other corporation. That one person also owns at least 25% of the shares of the other corporation (other than shares of a specified class). It isn’t necessary that the members of the group be related to each other. See an example
  • Each corporation is controlled by a related group, with all members of one group related to all members of the other group. One or more persons who are members of both groups, either alone or together, own at least 25% of the shares of each corporation (other than shares of a specified class). See an example
  • Two corporations that aren't otherwise associated with each other will be considered associated with each other if they are associated with the same corporation (the third corporation). See an example

Association Rules for Charitable or Non-Profit Employers

Charitable or non-profit employers are not subject to the association rules and do not have to share the exemption amount. If an employer, other than a charitable or non-profit employer, is associated with a charitable or non-profit employer, those employers are deemed not to be associated.

Although the association rules don’t apply to charitable or non-profit employers - where two employers that are not charitable or non-profit employers and would otherwise not be associated with each other are each associated with the same charitable or non-profit employer – those two employers can be deemed to be associated with each other. This rule applies under Section 16(3)(a) of the Employer Health Tax Act. See a similar example.

How to Apply Associated Employers Rules to Individuals, Partnerships and Trusts

Individuals, partnerships and trusts are considered to be corporations with one class of voting shares. To determine ownership of shares:

  • Sole Proprietor: The individual owns all of the shares of the corporation.
  • Partnership: Each partner owns shares in the same proportion in which he or she shares the income or loss of the partnership.
  • Trust: Each beneficiary of a trust owns shares in the same proportion in which he or she shares the income or loss of the trust.

Note: If you're an employer who is associated with a charitable or non-profit employer, you aren't required to share the exemption with the charitable or non-profit employer. 

Exemption Amount for Associated Employers

If you are a member of a group of associated employers, you have to decide whether the group is eligible for the exemption based on the group’s combined B.C. remuneration.

If you’re an associated employer on December 31 of a calendar year and the combined B.C. remuneration paid during that calendar year by all the associated employers is:

  • $500,000 (exemption amount) or less: 
    • You don’t pay the employer health tax for the calendar year.
  • Between $500,000.01 and $1,500,000 (threshold amount):
    • The group is eligible for the $500,000 exemption amount,
    • You must have an agreement to share the $500,000 exemption amount to all employers in the group for the calendar year, and
    • Each employer in the associated group with B.C. remuneration greater than the allocated exemption amount pays the employer health tax at 2.925%.
  • Greater than $1,500,000:
    • You aren’t eligible for the exemption amount for the calendar year, and
    • Each employer in the group pays the employer health tax at 1.95% of the employer’s B.C. remuneration.

The $500,000 exemption amount and the $1,500,000 threshold are prorated if, for a period in a calendar year, no employer in the group has a permanent establishment in B.C.

Examples - Calculating the employer health tax for an associated group of employers

Corporation A and Corporation B are an associated group of employers. Corporation A has B.C. remuneration of $100,000. Corporation B has B.C. remuneration of $300,000.

To determine whether Corporation A and Corporation B are entitled to claim the exemption amount of $500,000, Corporation A and Corporation B are required to combine their B.C. remuneration.

The combined B.C. remuneration of Corporation A and Corporation B is $400,000. Because the combined B.C. remuneration is below $500,000, neither Corporation A nor Corporation B is required to pay the employer health tax.

Corporation C and Corporation D are an associated group of employers. Corporation C has B.C. remuneration of $200,000. Corporation D has B.C. remuneration of $400,000.

To determine whether Corporation C and Corporation D are entitled to claim the exemption amount of $500,000, Corporation C and Corporation D are required to combine their B.C. remuneration.

The combined remuneration of Corporation C and Corporation D is $600,000. Because the combined B.C. remuneration is below $1,500,000, Corporation C and Corporation D are entitled to claim the exemption amount of $500,000.

As a group of associated employers, Corporation C and Corporation D must enter into an agreement to share the exemption amount. Corporation C claims an exemption amount of $200,000. Corporation D claims an exemption amount of $300,000.

Corporation C will calculate its employer health tax as:

2.925% x ($200,000 - $200,000) = $0

Corporation D will calculate its employer health tax as:

2.925% x ($400,000 - $300,000) = $2,925

Corporation D and Corporation E are an associated group of employers. Corporation D has B.C. remuneration of $700,000. Corporation E has B.C. remuneration of $900,000.

To determine whether Corporation D and Corporation E are entitled to claim the exemption amount of $500,000, Corporation D and Corporation E are required to combine their B.C. remuneration.

The combined remuneration of Corporation D and Corporation E is $1,600,000. Because the combined B.C. remuneration exceeds $1,500,000, neither Corporation D nor Corporation E are entitled to claim the exemption amount of $500,000.

Corporation D will calculate its employer health tax as:

1.95% x $700,000 = $13,650

Corporation E will calculate its employer health tax as:

1.95% x $900,000 = $17,550

 

Prorating Exemption and Threshold Amounts

The $500,000 exemption amount and the $1,500,000 threshold amount are prorated if, for a period in a calendar year, no employer in the group has a permanent establishment in B.C.

In a group of associated employers, Corporation A has a permanent establishment in B.C. from July 1 until the end of a calendar year (184 days). The other corporations in the group have shorter periods for having a permanent establishment in B.C. in the calendar year (all starting after July 1).

The $500,000 group exemption amount and the $1,500,000 group threshold amount are prorated as follows:

  • Maximum group exemption amount = $500,000 x (184/365) = $252,055
  • Maximum group threshold amount = $1,500,000 x (184/365) = $756,165

If the combined remuneration paid during the calendar year by all of the associated employers is:

  • $252,055 or less, you don’t pay the employer health tax for the year
  • Between $252,055.01 and $756,165:
    • The group is eligible for the exemption amount of $252,055
    • Each employer in the associated group with B.C. remuneration greater than the allocated exemption amount pays the employer health tax at 2.925%
  • Greater than $756,165
    • The group isn’t eligible for the exemption amount for the calendar year
    • Each employer in the group pays the employer health tax at 1.95% of the employer’s BC remuneration

Sharing the Exemption Amount

To determine the exemption amount for each employer in an associated group of employers, follow these steps:

  1. Calculate the group’s maximum exemption amount
  2. Calculate what each employer's maximum exemption amount would be if the employer wasn’t associated. This is the maximum exemption amount each employer can be allocated in the share agreement
  3. Choose how you want to allocate the total group exemption amount to each employer, ensuring the group maximum exemption amount and each employer's maximum exemption amount are not exceeded
  4. Enter into an allocation agreement outlining each employer's exemption amount

Example - Sharing the exemption amount

Corporation A has a permanent establishment in B.C. from March 1 to December 31.

Corporation B has a permanent establishment in B.C. from May 1 to December 31.

Corporation C has a permanent establishment in B.C. from July 1 to December 31.

Corporations A, B and C are associated employers on December 31.

 

Step 1: Calculate the group maximum exemption amount

For 59 days of the calendar year (from January 1 to February 28), no employer in the group has a permanent establishment in B.C. Therefore, the exemption amount and threshold amount must be prorated for the 306 days that at least one employer had a permanent establishment in B.C.

  • Maximum exemption for the group = $500,000 x (306/365) = $419,178
  • Threshold amount for the group = $1,500,000 x (306/365) = $1,257,534

To calculate the maximum exemption amount for each employer within the group of associated employers, each employer would calculate their maximum exemption amount as follows:

  • Corporation A has a permanent establishment in B.C. from March 1 to December 31.
    Corporation A has a permanent establishment for the longest period of the group. Therefore, Corporation A’s maximum exemption amount is the same as the maximum exemption amount for the associated group of employers ($500,000 x 306/365) = $419,178
  • Corporation B has a permanent establishment in B.C. from May 1 to December 31.
    Corporation B’s maximum exemption amount is ($500,000 x 245/365) = $335,616
  • Corporation C has a permanent establishment in B.C. from July 1 to December 31.
    Corporation C’s maximum exemption amount is ($500,000 x 184/365) = $252,055

An agreement cannot assign an exemption amount to an employer that is higher than the exemption amount that employer would have been eligible for if that employer weren't associated.

The total (group) exemption amount claimed by all the employers in the group can’t exceed the group maximum exemption amount.

In this example, no more than $419,178 can be shared among the associated group of employers.

In addition, no more than:

  • $419,178 can be allocated to Corporation A
  • $335,616 can be allocated to Corporation B
  • $252,055 can be allocated to Corporation C

Some possible exemption allocation options are:

  • $419,178 to Corporation A and zero to Corporations B and C
  • $100,000 to Corporation A, $100,000 to Corporation B, and $219,178 to Corporation C
  • Zero to Corporation A, $300,000 to Corporation B, and $119,178 to Corporation C

Once the group has decided how to allocate the $419,178 exemption amount, they must enter into an allocation agreement outlining each employer's exemption amount for the calendar year.

 

How to Pay

Each employer that is part of an associated group of employers is required to register for the employer health tax, file its own tax return, pay its own employer health tax, and pay any required instalment amounts. 

When filing a tax return, the allocation agreement is not required to be submitted with the annual tax return. However, each of the associated employers should retain a copy of the allocation agreement since it may be requested at any time.   

Modifications to Association Rules

The association rules only apply to employers that are associated with each other on December 31 of a calendar year.

If Employer A and Employer B aren't otherwise associated with each other, but are each associated with Employer C, all three employers are considered to be associated with each other. Unlike the association rules under the Income Tax Act (Canada), the employers cannot elect out of the association rules.

Note: Sections 256(7) to (9) of the Income Tax Act (Canada) don’t apply to the association rules under the Employer Health Tax Act.

Anti-Avoidance Rule

In addition to a general anti-avoidance provision, the Employer Health Tax Act also contains an anti-avoidance provision that specifically deems employers to be associated – where those employers are not otherwise associated under the Employer Health Tax Act.

Section 16(3)(d) of the Employer Health Tax Act provides that employers may be deemed to be associated with each other at the end of a calendar year where it is reasonable in the circumstances to consider that employers have either:

  • separated their existence at the end of a calendar year, or
  • transferred their business or part of a business from one employer to another employer in a calendar year,

with the primary purpose of reducing the employer health tax by any one of the employers for the calendar year.